We need to know our limits: We should not delude ourselves that we understand our companies better than the people managing them. However, we should make it clear where our priorities lie. We expect companies to be managed for long-term value creation, not short-term profit maximization. We expect them to pay due care and attention to social and environmental externalities that could incur a material financial cost at some point down the line. And if constructive engagement bears no fruit, we will exercise our voting powers to force the issue. Engagement and proxy voting are meant to work in tandem. Proxy votes, unlike engagement alone, can provide a measurable snapshot of investor sentiment—and force the adoption of binding resolutions on companies not cooperating with investors.
While many activist investors are aggressive in their engagement strategies, the rise of collective engagement organizations has been driven by some of the largest asset managers and asset owners. Participating in collective engagement gives both larger and smaller shareholders a powerful voice for communicating and influencing change. We believe working together allows for a more efficient engagement process and encourages productive discourse on the issues at hand. Overall, collective engagement can lead to more effective, reasonable engagements that have the power to drive change in the real economy.
What About Debt?
When people think about active ownership, they often think about equities. But what about fixed income, especially for investors in long maturity bonds? In our view, while there is a healthy tension between bondholders and shareholders on some issues, such as capital allocation, both want borrowers to effectively manage long-term ESG issues that could negatively impact future cash flows, as well as their ability to service debt and pay back capital. To help ensure the long-term performance of the bond and the company, we believe fixed income owners must adopt an ownership mentality like that of equity owners in order to foster an effective dialogue and influence the company. Negative screening eliminates that opportunity.
Conclusion
Most investors share a common goal: to generate strong, durable risk-adjusted returns. It is our obligation and fiduciary duty as investment managers to behave as long-term owners when we invest our clients’ assets. To us, exclusionary policies limit our effectiveness and don’t help us achieve this goal for our clients. We believe thoughtful engagement and proxy voting practices are vital to encouraging sustainable value creation and economic growth.
Please keep in mind that a sustainable investing approach does not guarantee positive results and all investments, including those that integrate ESG considerations into the investment process, carry a certain amount of risk including the possible loss of the principal amount invested.
Barnaby Weiner is head of stewardship and sustainability at MFS, and Vishal Hindocha is managing director of sustainability strategy at MFS.