When activist shareholders want to make their feelings known about a company’s behavior on the world stage, whether  in regard to climate change or workplace diversity, they often do it at annual company meetings. “What ya gonna do about it?” is essentially the recurring question.

But more fund managers are engaging differently with the companies they invest in. San Francisco-based mutual fund company Parnassus is the largest fund company in the environmental, social and governance space in the United States, with $27 billion in assets under management. Parnassus doesn’t consider management at its portfolio companies to be either foe or friend. Instead, the fund manager pursues a collaborative relationship where symbiosis produces profits—or at least that’s the hope.

“We define engagement as meaningful dialogue with the companies and Parnassus itself to understand the [portfolio company’s] operations and also to give them some of our feedback on what we think are relevant ESG topics,” says Iyassu Essayas, Parnassus’s director of ESG research. “Ultimately what we’re trying to do is to help encourage the company to take some action or pay attention to matters that are important to our investors.”

To emphasize the importance of its engagement philosophy and action, Parnassus recently explained in its first ESG Engagement Report, “Today, as more and more people are choosing to use their capital to further ESG causes, we believe it is vitally important to continue sharing our perspective that ESG integration is beneficial for investors, companies and society.”

ESG investing is on the upswing. Approximately one out of every four dollars professionally invested in the United States is conditioned by some form of ESG screen, according to the Forum for Sustainable and Responsible Investment. That amounts to more than $12 trillion, according to US SIF’s 2018 biennial “Report on U.S. Sustainable, Responsible and Impact Investing Trends,” a jump of at least 38% from 2016, and more than 18 times as much as when data were first compiled by the organization in 1995.

This trend has prompted more companies to produce corporate social responsibility reports. Eighty-six percent of the companies listed in the S&P 500 now issue CSR reports, up from just 20% in 2011.

Jerome Dodson founded Parnassus in 1984 believing that companies embracing socially conscious initiatives and sound environmental policies would boast competitive advantages. The firm has grown from the $300,000 garnered from family and friends at inception to nearly a hundred thousand times that amount today.

“Our investors, they actually want to invest within their values,” Essayas says. “They do want their capital to help improve the E, S or G performance of the companies. And so having an engagement initiative on the company, our investors encourage us to do that. What we’re seeing is that the topics that we bring up, the ESG topics, are becoming more and more prevalent to other investors out there—the more traditional investors. And so these conversations that we’ve been having for years are starting to get easier and easier because companies are starting to recognize that investors are starting to take the sustainability and the ESG topics a lot more seriously, and that they need to be more transparent about what’s going on.”

Parnassus’s ESG Engagement Report is a fascinating read and a sort of behind-the-scenes look at how the investment firm conducts due diligence. It is rife with examples of corporate behavior gone bad and corporate behavior done good.

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