Investors face a choice about how to treat companies with less than perfect sustainability characteristics – they can exclude them from their portfolio or they can invest in them and aim to change corporate behaviour.

As my first blog post outlined, excluding companies or engaging with them are two of the tools in a sustainable investors’ kit. And these tools will be used by managers across the range of different investment styles outlined in the second post.

The debate about the benefits of exclusion versus engagement debate has raged for many decades and has become more nuanced over time. Pension schemes and asset managers now prefer to keep exclusions for egregious stocks such manufacturers of cluster bombs and tobacco companies.

Forcing change

But for other companies, like oil and gas majors, asset owners’ preference is often to invest in these companies and then engage with them to change their behaviour.

While some think funding fossil fuels should be curtailed, many institutional investors think investing in these companies and then engaging with them is a more effective way to achieve net zero.

By working together through Climate Action 100+, pension schemes and asset managers were able to persuade BP to adopt net zero targets by 2050.

This example shows how effective engagement can be. But it’s not always this successful. Sometimes it results in an endless conversation between a company and an asset manager which yields few changes in corporate behaviour.

Savvy asset owners and managers are aware of the pitfalls and will do their research to ensure they do not embark on program which will yield few results. They will also monitor and measure to keep an eye on progress and prevent their engagement from becoming a futile exercise.

Skin in the game

But best recipe for success is if investors to work together. That’s because even a large asset manager or pension scheme is likely to own only a small stake of a global company’s overall shareholder equity, making it easier for the executive board to ignore these concerns.

When asset owners and managers work together the combined stakes become too big to ignore. It’s much easier to attract the attention of both corporate boards and the press when investors form a group to campaign for change.

Climate Action 100+ showed investors how effective it can be when they work together and they are now considering other ways to work as a group.

For example, the BT Pension Scheme is looking at ways to work with other investors to review climate change policy of different governments. This should make it easier to exert pressure when investing in sovereign debt.

The ability of investors to change corporate behaviour should become stronger over time. That’s something you need to consider before chiding an investment manager or a pension scheme for not excluding a particular company. If don’t have any skin in the game, how can you make companies change their behaviour?

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