Engaging Companies on ESG Issues Promotes Best Practices
Q&A with Mary Jane McQuillen, Managing Director, Portfolio Manager, Head of Environmental, Social and Governance (ESG) Investment at ClearBridge
Have you seen changes in the way companies react to questions about their environmental, social and governance activities?
We have observed in the past year that companies are becoming increasingly more predisposed to reach out to us as shareowners and are clearly interested in having our feedback on everything from executive compensation to supply chain monitoring programs to environmental initiatives. Companies are more proactive about meeting us halfway. Instead of our analysts laying out the discussion and seeking responses, managements are now engaged in sustainable thinking enough to solicit our views on relevant ESG topics. Some examples that stand out from the last year are our engagements with Home Depot and Costco, where we provided guidance on best practices for disclosure and reporting.
Does this mean we’ve reached an inflection point in engagements?
While companies have sought ESG guidance from our analysts in the past, in 2018 we noticed this happening more frequently. Usually this occurs with companies we have owned and engaged with for a long time, such as Trex; in some ways it is a natural result of sustained, meaningful engagement. But in aggregate, we are seeing something of an inflection point.
For years, as impact investors, we devoted much of our energy to convincing companies that it made shareowner sense for them to discuss these material ESG issues with us. Now many are doing so of their own accord. Moreover, often they wish to pick up where we last left off on topics, and we are seeing an increase in the continuity of the conversation.
Historically, only large-cap U.S. companies engaged in ESG conversations with equity investors. Is that changing?
While our analysts are at the heart of our ESG integration and engagement efforts, our portfolio management teams also play a vital role in discussing ESG issues and the value of considering these issues in company business models and strategy. With the growth of interest in international ESG strategies, we are pleased to have seen progress in formalizing our engagement process with non-U.S. companies. Our international growth and value teams are beginning discussions with companies a little further afield than developed equity markets, and these are unusual engagements.
We are also seeing further development of our engagements with small-cap companies. Given the coverage of small-cap companies in ClearBridge portfolios, small-cap engagements are uniquely important. They represent for us the next generation of company engagements, both because as small-caps they do not typically have the coverage larger companies routinely get and because we have a chance to cultivate relationships and nurture ESG practices at companies from the ground up, like we have done in our discussions with small cap beverage maker Cott. Ideally, by the time these companies become mid or large, they will have integrated sustainability practices. We also tend to have more influence with small cap companies, because they are often looking for guidance as they are still in their adaptive phase.
How do you see the future of ESG investing?
While large public companies may not be run with the primary intention of creating impact, by virtue of their size and complex stakeholder relationships across supply chains, distribution networks and communities where they operate, we believe they make a social and environmental impact at every level.
We can amplify this impact by being intentional active investors through our allocation of capital and direct engagement with company managements. We source investment ideas and construct portfolios by integrating ESG analysis into the sector and company research performed by analysts on ClearBridge’s centralized fundamental research platform, as well as analysts dedicated to specific portfolios. Our analysts and portfolio managers examine the ESG issues relevant to a company’s business activities, measure and evaluate their impact on both qualitative and quantitative bases, and suggest ways for companies to improve their ESG practices.
This integrated approach results in a thorough and detailed evaluation of a company’s risks and opportunities related to issues like corporate governance, labor/hiring practices, community involvement and climate change. Publicly traded enterprises are making powerful impacts all over the world. By examining the various facets of their business and engaging with company managements on material issues, we can drive positive change on a global scale while also contributing to financial returns.
Mary Jane McQuillen is Managing Director, Portfolio Manager and Head of Environmental, Social and Governance Investment at ClearBridge, a subsidiary of Legg Mason. Her opinions are not meant to be viewed as investment advice or a solicitation for investment.
Mary Jane McQuillen
Managing Director, Portfolio Manager, Head of Environmental, Social, and Governance Investment at ClearBridge
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