Investor engagement: the corporate perspective
Stewardship and engagement have long been core elements of WHEB’s approach to delivering positive impact. We often offer a counterweight to the short-termism exhibited by much of the investment community. More recently, stewardship has become more important to a broader group of investors. With this growing emphasis in mind, we interviewed several portfolio companies to find out what it is like being on the other end of investor engagement. Several commented that nobody had asked them to reflect on their experiences before, and for some the process was clearly cathartic.
Our interviewees were drawn from a cross-section of WHEB’s portfolios covering different sectors, different sizes and different geographies. For some, the importance of ESG and sustainability was integral to the formation of their role. Volker Braun at Evotec, for example, is formally head of both Investor Relations (IR) and ESG, a decision made by the company to better respond to growing investor interest in these topics. In other companies these roles are split, but in all cases, there is clearly a very active internal dialogue between IR and sustainability.
- Andrew Hedberg, Vice President Investor Relations, Ecolab
- Volker Braun, Head of Global Investor Relations and ESG, Evotec
- Daniel Bohsen, Corporate Vice President and Head of Investor Relations, Novo Nordisk
- Ciaran Potts, Head of Investor Relations, Smurfit Kappa
- Mal Patel, Head of Investor Relations, Spirax-Sarco Engineering
How much time is spent on sustainability and which of your investors are most interested?
Ciaran Potts (Smurfit Kappa) started working in IR in 2015. Back then, he said, ‘99.99% of questions were on business fundamentals with almost nothing on sustainability’. This has changed dramatically and ‘now there are a significant number of questions on sustainability’. Without exception, everyone agreed that the level of interest in ESG and sustainability has increased dramatically. ‘It has just exploded,’ said Andrew Hedberg (Ecolab). ‘The rapid growth of interest in this area over the last five years has been incredible. We used to have ESG-focused investor calls once a quarter and now they happen almost weekly.’
Some IR teams suggested that the proportion of time spent on ESG is now about 10%. For others it is significantly higher. ‘Probably around 20% of all questions are on ESG and sustainability’ according to Daniel Bohsen (Novo Nordisk). Andrew (Ecolab) put it even higher, at a third of all questions focused on sustainability. For several interviewees, including at Ecolab and Novo Nordisk, sustainability has been a core part of the equity story for many years. As Daniel (Novo Nordisk) put it, ‘We have a strong story, with the ‘triple bottom line’1 integrated into our bylaws since 2004. We want to make sure that the sustainability part of our equity story is understood.’
The range of investors that are interested in ESG is also now very broad. Long-only fundamental investors are a core constituency, but there is still a bias towards European investors. US investors – albeit primarily on the East and the West Coast – have become significantly more active on ESG issues in the last couple of years.
What are the key sustainability topics that investors want to talk about?
Perhaps not surprisingly, given they are all WHEB portfolio companies, the positive impact of products or services is high on the list of investor questions. For several companies, including Evotec, the initial focus was on carbon emissions, but ‘this has moved to a stronger focus on social topics, which is an area where [their] products and services have the highest impact.’
Several companies also highlighted the approach of more sophisticated, often long-only investors that focus on material ESG issues for the business. Ciaran (Smurfit Kappa) contrasts this approach with that used by other investors that ‘have large ESG teams that are not part of the investment decision-making process’. These groups tend to use ‘blanketed generic emails that get sent out to hundreds of companies,’ says Andrew (Ecolab), and that do not reflect the reality of very different businesses in very different sectors. ‘There is still a huge spread in terms of expertise across the investor base,’ says Ciaran (Smurfit Kappa). Volker (Evotec) was more pointed. For some investors, ‘it feels like [looking at ESG] is more a duty than a commitment,’ he said.
The trend over the past few years has also been towards a much greater range of questions. For Ecolab the questions were ‘almost all focused on governance six years ago. Now it is the full [ESG] spectrum.’ One of the emerging issues that several respondents pointed to was biodiversity. Another was the circular economy. However, several interviewees made the point that the nature of investor engagement is also changing. Daniel (Novo Nordisk) underlined the importance of moving from a ‘checkbox approach where nuances are lost’ to an ‘ongoing dialogue’ that facilitates real learning – both for the company and the investor.
What do you find most challenging about investor engagement?
Almost all interviewees highlighted the same problems. The first is linked to the ‘checkbox approach’, which many saw as indicative of a lack of understanding of the company. One interviewee bemoaned the experience of ‘having people coming straight out of college picking up positions of influence and adopting a confrontational approach while asking questions that have little relevance to [the] business.’ Another bugbear highlighted by many companies was that analysts often do not bother reviewing publicly available information before contacting the company.
The wide range of questions that are often levelled at companies is also seen as a challenge – particularly when these are raised in meetings without time to prepare. ‘I’m a big fan of standardisation,’ said Daniel (Novo Nordisk). Several companies are supportive of the International Sustainability Standards Board (ISSB) process, which they hope will reduce the variety of questions from investors and rating agencies as well as the risks associated with partial disclosure.
‘The lack of clear objectives in terms of what is being assessed’ was also highlighted by Mal Patel (Spirax-Sarco). A related point was made by Ciaran (Smurfit Kappa) about the lack of specificity in what investors want to see. ‘We only get specific targeted suggestions on the governance stuff. A specific percentage board representation, for example.’ And there is always ‘the classic “is your CO2 reduction target SBTi-validated?”’. Too often, investors come with vague open-ended questions which IR teams are ill-equipped to answer without sufficient forewarning and preparation. A particular ‘horror story’ at one company involved a very large investor threatening to vote against management unless the company completed a detailed questionnaire on the company’s carbon strategy – and gave them 24 hours to do so.
Finally, as Mal (Spirax-Sarco) said, the ‘disconnect between fund managers and stewardship teams’ can be extremely frustrating. Quite often these teams appear not to be well coordinated. They can sometimes even be pushing companies in opposite directions. As one interviewee put it, ‘On the rare occasions that you can get both sides in the same room, it’s clear they don’t talk frequently, and they can even be quite confrontational with each other.’
What does successful engagement look like from the corporate perspective?
While there are clearly many frustrations with investor engagement, companies were also keen to stress the real value of ‘good’ investor engagement. For Andrew (Ecolab) it is all about seeing the relationship as a partnership. ‘I view it as a partnership. Both the corporate and the investors being really open and transparent about what the investors are looking for.’ A similar point was made by Daniel (Novo Nordisk): ‘I would actually like to have a more ongoing dialogue because that's the way we can best help. Working together we can get better and provide the right information.’
More practically, companies are keen to hear directly from investors rather than just respond to the ‘avalanche of questionnaires asking similar questions that all have to be answered individually’. Volker at Evotec advises investors to ‘pick up the phone, arrange a zoom call – having more meetings would be much more efficient’.
But the information does not just flow one way. Companies are also interested in learning from their investors. ‘Investors can share with us the best practices that they are seeing from other companies,’ Andrew (Ecolab) said. ‘With a partnership mindset we can learn a lot from shareholder engagement. It has definitely sparked change.’ In addition, at WHEB we have often sought to draw attention to emerging issues that portfolio companies have yet to address. This role is seen as valuable. As Ciaran (Smurfit Kappa) put it, ‘conversations with WHEB have been very helpful because you asked about things that the company had not focused on, but then became very relevant years later’.
What does the future hold for investor engagement?
Clearly, companies are keen to see more sophisticated dialogue focused on material issues and less checkbox questionnaires. But beyond this, what does the future hold for investor engagement? Perhaps surprisingly, most interviewees were unconcerned about investors claiming credit for positive changes made by their businesses following engagement. Some saw this as inevitable (in part driven by regulatory change), and others saw it as a positive outcome from the ‘partnership’ type of engagement that companies want to see more of. I don’t see any immediate downside’, said Ciaran at Smurfit Kappa. ‘This is really a win-win as far as I am concerned.’
At WHEB we will use this feedback to hone our approach to corporate engagement. We believe that it clearly emphasises the value in having an integrated approach to impact investment where engagement is led by the core analyst team. The need to focus on material ESG issues is also welcome as this is also a core tenet of our approach, along with the need to frame engagement around the long-term value to the investee company’s business.
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1 The ‘triple bottom line’ is an accounting framework encompassing social, environmental and economic dimensions. Business writer John Elkington coined the phrase in 1994 in his book ‘Cannibals with forks’.
