Ethical investment: the rules of engagement

3rd April 2020

Web p26 main

Related Topics

Related tags

  • Business & Industry ,
  • Investment



Quintin Rayer offers tips for ethical investors that want to strengthen their engagement with companies

Ethical and sustainable investors focus on issues such as environmental, social and governance (ESG) factors, UN Sustainable Development Goals and traditional areas such as alcohol, tobacco, gambling, pornography, armaments, nuclear power, animal testing and intensive farming.

Many investors are also acutely aware of the increasing likelihood of extreme weather events and other challenges associated with global warming. Despite Paris Agreement targets to hold global average temperature increases to less than 2°C above pre-industrial levels, current warming appears to be on track for at least 3°C by 2100.

Many fund managers engage with companies to end harmful practices. Yet engagement is opaque, and fund selectors struggle to assess managers' commitment and progress made.

Engaging for a 'green rinse'?

Concerns that sector exclusions can lead to under-performance may motivate less categorical policies such as engagement, underweighting firms with harmful activities or overweighting those that support solutions. It is not obvious that ethical investments should underperform. Ethical strategies may offer reduced risk and competitive advantage, with several studies supporting this conclusion.

Many ethical investors state that they use engagement to influence companies. While position size and holding period help, it is tough to appraise the quality and commitment to engagement work. Discussions with NGOs and others suggest this vital area is significantly under-assessed. A stronger focus on engagement is essential, especially for it to be a key tool for addressing issues such as climate change.

Difficulties appraising engagement quality can lead to fears of greenwashing – engagement could be a 'cosy chat' with management, with no real prospect of company action. Fund managers may fear to confront boards in case they damage relationships, reducing access to corporate information.

Strengthening engagement

Many mutual funds outsource voting to proxy firms, passively following their guidance more than 95% of the time. This appears weak, particularly if managers are not even formulating their own views. Funds should be defining in-house voting policies. Stronger approaches might involve proposals linking director remuneration to issues of concern or resolutions that formally instruct directors to address them.

Engagement should involve more than voting; a two-way dialogue is required. Ethical investors should discuss legitimising standards and their expectations, and follow up with boards. They may need to identify issues and develop the expertise to actively educate boards on emerging problems.

Fund managers need non-confrontational ways to raise contentious issues without damaging relationships with boards. Identifying and sharing best practice may be one approach. Sector benchmarking might be another, with robust assessments shared anonymously or published as circumstance permits.

Engagement escalator

When overtures do not produce results, managers should follow an escalation pathway, involving progressively more assertive engagement practices. Follow up initial meetings with collaborations with other investors, public statement of concerns, voting against boards or, ultimately, divestment.

Some fund managers may see voting against boards as evidence of engagement failure. However, boards should not expect to be able to take institutional shareholder support for granted. Like divestment, engagement is likely to be more effective when backed by the credible threat that you are prepared to oppose board resolutions. Discussions with boards before and after voting could help place voting decisions within a more constructive context.

For impactful engagement, fund managers will need to allocate significant resources to researching issues thoroughly. They will be able to present problems to boards, together with possible solutions. If boards find that engagement discussions with investors become a valuable source of information on business challenges, perhaps tricky conversations can be used to strengthen, rather than damage, relationships.

Tangible results

Fund managers carrying out engagement need to ensure it has an impact. Tangible results are necessary, particularly as engagement quality is hard to assess.

A global climate crisis is emerging, with fossil divestment or engagement proposed to help promote the transition to a low-carbon economy. If engagement quality is opaque and results appear inadequate, investors will drop engagement as a tool in this crucial area. Fund managers need to ensure that engagement produces meaningful outcomes.

However, engagement and divestment need not be competing opposites. Divestment or engagement need not be justified as if everyone followed the same approach by adopting a Kantian imperative. Individual investors are not the entire market, and a credible divestment threat is an important part of engagement. Those investors who divest and clearly say why give strength to those continuing to engage.

To read a version of this article with references, please visit

Dr Quintin Rayer is a Chartered Wealth Manager, Fellow of the Institute of Physics, and head of research and ethical investing at P1 Investment Management.


Subscribe to IEMA's newsletters to receive timely articles, expert opinions, event announcements, and much more, directly in your inbox.

Transform articles

How much is too much?

While there is no silver bullet for tackling climate change and social injustice, there is one controversial solution: the abolition of the super-rich. Chris Seekings explains more

4th April 2024

Read more

Alex Veitch from the British Chambers of Commerce and IEMA’s Ben Goodwin discuss with Chris Seekings how to unlock the potential of UK businesses

4th April 2024

Read more

Five of the latest books on the environment and sustainability

3rd April 2024

Read more

The UK’s major cities lag well behind their European counterparts in terms of public transport use. Linking development to transport routes might be the answer, argues Huw Morris

3rd April 2024

Read more

Ben Goodwin reflects on policy, practice and advocacy over the past year

2nd April 2024

Read more

A hangover from EU legislation, requirements on the need for consideration of nutrient neutrality for developments on many protected sites in England were nearly removed from the planning system in 2023.

2nd April 2024

Read more

It’s well recognised that the public sector has the opportunity to work towards a national net-zero landscape that goes well beyond improving on its own performance; it can also influence through procurement and can direct through policy.

19th March 2024

Read more

The UK government’s carbon capture, usage and storage (CCUS) strategy is based on optimistic techno-economic assumptions that are now outdated, Carbon Tracker has warned.

13th March 2024

Read more

Media enquires

Looking for an expert to speak at an event or comment on an item in the news?

Find an expert

IEMA Cookie Notice

Clicking the ‘Accept all’ button means you are accepting analytics and third-party cookies. Our website uses necessary cookies which are required in order to make our website work. In addition to these, we use analytics and third-party cookies to optimise site functionality and give you the best possible experience. To control which cookies are set, click ‘Settings’. To learn more about cookies, how we use them on our website and how to change your cookie settings please view our cookie policy.

Manage cookie settings

Our use of cookies

You can learn more detailed information in our cookie policy.

Some cookies are essential, but non-essential cookies help us to improve the experience on our site by providing insights into how the site is being used. To maintain privacy management, this relies on cookie identifiers. Resetting or deleting your browser cookies will reset these preferences.

Essential cookies

These are cookies that are required for the operation of our website. They include, for example, cookies that enable you to log into secure areas of our website.

Analytics cookies

These cookies allow us to recognise and count the number of visitors to our website and to see how visitors move around our website when they are using it. This helps us to improve the way our website works.

Advertising cookies

These cookies allow us to tailor advertising to you based on your interests. If you do not accept these cookies, you will still see adverts, but these will be more generic.

Save and close