The term ‘engagement’ seems to be an inescapable part of fund managers’ dialogue these days. But what does it actually mean when they say they actively engage with companies on ESG and why is this important?
ESG engagement at a basic level refers to the collaboration between stakeholders (in this case, fund managers) and companies to encourage them to embrace more sustainable practices.
It normally involves engaging in dialogue, exercising their voting rights and influencing corporate behaviour to promote more responsible practices. Interacting with firms also helps build a level of trust and understanding between the two parties.
This will help guide a fund manager’s qualitative assessment of a business to determine whether it’s in good hands.
The vast majority of funds invest in a wide range of companies that are in truth quite far from having perfect ESG credentials. The suggested implementation of deeper ESG policies can also be met with an unwillingness by some companies, as it often comes at considerable expense and could alter a business model that is functioning effectively and generating healthy profits.
But it is important fund managers continue to urge businesses to adopt sustainable practices.