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The importance of ESG engagement – 2 fund case studies

We take a look at how investing can have a positive impact on society and the environment through two fund engagement case studies.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Engagement is how investors, shareholders and fund managers express opinions and influence companies' decisions.

When you own a share in a company, you own a small part of a business. That means you get certain rights including a say on how the company's run. You can attend shareholder meetings and vote on management's proposals, or if you can't attend, you can cast a proxy vote.

Fund managers often have greater stakes in companies. It means they can have a bigger say on a range of issues – from strategy and operational performance, to risk management and management's pay. They can also influence companies to adopt better Environmental, Social and Governance (ESG) practices.

Engagement can also take place on a sector level, engaging with the local regulator, government, or community. Fund managers can have a positive impact in the areas they invest, while minimising risk and protecting shareholder value.

In this article, we look at the impact fund manager engagement can have, and how Stewart Investors and Baillie Gifford have successfully engaged with companies they invest in.

This article isn't personal advice. If you're not sure if an investment is right for you, ask for financial advice. All investments fall as well as rise in value, so you could get back less than you invest.

Investing in these funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

Stewart Investors Worldwide Leaders Sustainability

This fund is managed by Sashi Reddy and David Gait. The fund invests in high-quality companies which are positioned to benefit from, and contribute to, the sustainable development of the countries in which they operate. The team mainly invest in shares of large and mid-sized companies around the world.

Single-use plastic waste is a key engagement topic for the team at Stewart Investors. Plastic waste can have significant environmental impacts. But the team also see plastic as a key risk for some companies due to changing consumer preferences and potential regulatory changes.

India, where around 16% of the fund invests, generates about 3.5 million tonnes of plastic waste a year. In 2018, India's environment minister announced that single-use plastics would be phased out. The ban is officially implemented this week, from 1 July.

When the announcement was made in 2018, the team held an interactive forum in Mumbai with 11 leading companies.

Some of the key actions to come out of the forum were:

  • The creation of a new industry body to proactively address plastic packaging waste
  • The implementation of a national communications campaign to educate consumers about the proper use and disposal of plastic packaging
  • A school educational programme to raise awareness around the disposal and recycling of plastics

This engagement has also been a catalyst for these companies to increase their use of recycled and recyclable plastics in their packaging.

The team see a company's receptiveness to engagement as an indication of quality. The response of management teams and willingness to adapt to change makes it clear what companies they want to back over the long term.

Emerging markets are generally less well regulated than the UK and it can sometimes be difficult to buy and sell investments in these areas. Political and economic instability are more likely, making these funds higher risk than those investing in more regulated and developed markets.

More about the Stewart Investors Worldwide Leaders Sustainability fund, including charges

Stewart Investors Worldwide Leaders Sustainability Key Investor Information Document

Baillie Gifford Positive Change

This fund is managed by a team of four – Kate Fox, Lee Qian, Michelle O'Keeffe and Edward Whitten. The fund invests in a relatively small number of high-quality companies which can deliver positive change across one of four areas – Social Inclusion and Education, Environment and Resource Needs, Healthcare and Quality of Life, and Base of the Pyramid (addressing the needs of the world's poorest populations).

Investing in a relatively small number of companies, and emerging markets, will also add risk.

The team believes engagement shouldn't be a box-ticking exercise or have a one-size-fits-all approach. They engage with management teams to learn more about their company, support their long-term ambitions and influence for positive change where it matters. That involves tackling important issues that are relevant to the future success of the business and society.

The importance of social factors has been brought to the forefront more recently. Companies' responses to the pandemic have highlighted how they manage relationships with their workforce, and how they operate within societies and political environments.

The Positive Change fund invests in FDM, an international recruitment company. Since 2018, the team's engaged with FDM to pay its 'Mounties' (trainees) during their initial training period. This should make the company more attractive for a broader spectrum of talent, rather than only those who can afford to train without being paid.

The team met with the CEO and CFO to emphasise their support for paying UK trainees at least the minimum wage. In June 2021, FDM announced that it will pay trainees in the UK, bringing its practice in line with other regions.

More about the Baillie Gifford Positive Change fund, including charges

Baillie Gifford Positive Change Key Investor Information Document

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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