Investor engagement: crossing boundaries

Discover how investor engagement is crossing boundaries.
September 2020

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Investor engagement on environmental, social and governance (ESG) issues is most prevalent among the equity asset class, and at the geographic level is mostly led by investors in developed markets. However, engagement is significantly spreading into other areas of the market.

Controversies such as the Volkswagen AG emissions scandal, which prompted downgrades in the company’s credit rating, served as a reminder of the relevance of ESG factors to fixed income analysis. We engaged multiple times with company representatives, including the chairman and Head of Group Strategy, to call for governance reforms, stronger internal controls and a long-term emissions reduction strategy.

The experience of our corporate fixed income investment teams in engaging issuers has shown us that companies’ need for continuous refinancing via bonds has played a key role in helping expand engagement to this asset class. The desire for debt issues to be successful, we have found, is a strong reason for companies to accept engagement on ESG matters. Moreover, the impressive growth of sustainability-related bond issuances has further improved investor access to traditional bond-only issuers and, as a result, they have added ESG to their agenda.

Investors in other asset classes, such as private equity, real estate and infrastructure, have come to realise that responsible investment approaches, including engagement, are relevant to supporting long-term value creation.

Risk Disclaimer

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Geographies

Factors such as insufficient ESG-related disclosure, differences in culture and regulatory environments and high levels of government and majority shareholder ownership, have historically made it challenging for active owners to engage with companies in emerging markets countries. Recognising that these countries are highly exposed to ESG-related issues, such as population growth, income inequality, climate change, corruption and forced labour, major investors have sought to overcome obstacles to engagement.

Since 2015, we have engaged with over 700 companies across 40+ countries, helping change attitudes towards discussing ESG issues with foreign shareholders whilst calling for better ESG practices. We have engaged giants such as Samsung ElectronicsTaiwan Semiconductor Manufacturing and Tencent on board composition and effectiveness, China Mobile on data privacy, Reliance Industries on emissions management and reporting, and Itau Unibanco on management of environmental and social risks in lending transactions.

We have also engaged other actors in markets such as Hong Kong, Taiwan, Brazil, South Africa and India, including regulators and stock exchanges, to help raise the bar on shareholder rights, investor stewardship and ESG disclosure requirements. This also helps drive engagement action, including from local investors.

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Over the two decades we have run an ESG engagement programme, we have seen more and more companies come to the realisation that if they work together with investors, both sides can reap the benefits in terms of long-term performance.

Juan Salazar, Director, Responsible Investment

Investors across the world step up

Although engagement with companies in Asia and other emerging markets has expanded over the past decade, it has been almost exclusively led by developed-market investors, primarily in Europe and the US. Given the increasing introduction of responsible investment regulations, guidelines and practices, we expect to see active ownership become a much stronger feature of the local investor agenda in other markets this decade.

Stewardship codes and similar initiatives have proliferated throughout Asia in the last five years. Japan, Hong Kong, Singapore, South Korea, Taiwan, Malaysia and Thailand have all adopted stewardship codes. China recently inserted provisions into its revised corporate governance code to promote shareholder stewardship among institutional investors.

Outside Asia, South Africa, Kenya and Brazil have also developed codes. In addition, a large number of emerging markets have now adopted corporate governance codes, stock exchanges increasingly call for mandatory or voluntary ESG disclosure, and there has been an explosion of emerging-market ESG indices.

We acknowledge that investor adoption of these codes will take different paths due to each adopting country’s distinctive cultural, institutional and legal context. However, we remain hopeful that they will help raise local investor awareness and action on engagement. As our own experience has taught us, investor collaboration can be a powerful way to progress engagement. We, therefore, intend to seek opportunities to partner with domestic investors to pursue engagement activities with companies in their jurisdictions.

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