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Social responsibility and transparency: can investors influence companies?

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The bribery scandal at FIFA has shown what huge reputations risks companies may face if they do business with partners that do not care about environmental, social, and corporate governance standards (ESG). The discussion about ESG has therefore gained in importance over the past months. The investors play an important part in this context, as they can themselves nudge companies towards social responsibility and transparency. Gerold Permoser, Chief Investment Officer of Erste Asset Management (EAM) in Vienna explains why the so-called engagement is important.

Gerold Permoser, Chief Investment Officer (CIO) of Erste Asset Management in Vienna.
Gerold Permoser,
Chief Investment Officer (CIO) of Erste Asset Management in Vienna.

Mister Permoser, eleven FIFA officials have recently been arrested, and president Josef Blatter has stepped down. Why is engagement also crucial in the context of sponsoring?

Permoser: Sponsors such as Adidas, Sony, and Visa have recognised the great reputation risk: scandals around bad working conditions, inconsistencies with regard to the award process of sports events, and allegations of corruption also come with negative effects on companies that support FIFA financially. Therefore sponsors have now publicly asked FIFA to clarify the background behind the award of the World Cup finals to Qatar and its terms as well as to focus more strongly on the aspect of sustainability in the preparations. The shareholders of Adidas went so far as to demand the termination of the sponsorship agreements with FIFA at the annual general meeting.

It is clear to see that shareholders, on the basis of their vote, have the power to effect change in the company. Long before shareholders voice their concerns at AGMs, investors can try to enter into a direct dialogue with the companies, for example within the framework of engagement activities. This facilitates an ongoing, structured, and sustainably successful dialogue for both sides.

Will engagement remain important, or is it just a fad?

Permoser: Of course not every engagement project causes the company to change its ways according to our wishes. That being said, engagement processes tend to show effects quite frequently. On the one hand companies can learn a lot about the expectations of sustainably oriented investors, on the other hand the inaccessibility to dialogue tends to be no good strategy when it comes to confronting a critical public. If for example an asset management company excludes a company from the investment universe due to the insufficient outcome of the engagement process, this step comes with a negative signalling effect, and the interest by the media tends to be a comprehensive one. Companies know this, which facilitates a dialogue of equal partners. The goal of the engagement process is of course to facilitate concrete improvements of the ESG factors. The exclusion from the investment universe can also trigger a change of attitude in the company, which in turn may cause it to resume the engagement dialogue. This means that engagement is not only a fad, but should and does lead to changes in the company over the long run. This is also important for investors: they, too, should pursue a long-term engagement process. The goal is to create sustainable change rather than to force a short-term event that is beneficial to the quarterly figures.

How can companies be convinced of ESG standards?

Permoser: As already pointed out, engagement happens in a dialogue of equal partners. This process helps the companies involved understand their status quo in terms of environmental, social, and corporate governance issues, and what opportunities of improvement are available to them. Companies are happy to take this offer. According to our engagement partners, the response rates of companies in developed countries are close to 60%. While in emerging countries companies tend to take the offer of a dialogue less frequently, the tendency is rising here, too. Also, no company wants to be seen as reluctant to dialogue or to be excluded by a large asset management company on the grounds of bad ESG standards. Companies have found out that sustainable investors are often long-term investors and are therefore more and more willing to meet their requirements. Lastly, engagement is also a very good method for companies to manage and reduce their ESG risks, because as part of the engagement process we jointly develop concrete measures to this end.
 
Find the latest issue of our ESG Letter here: www.esgletter.at
 

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This document is an advertisement. All data is sourced from ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H., Erste Asset Management GmbH and ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. unless indicated otherwise. Our languages of communication are German and English.

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This document serves as additional information for our investors and is based on the knowledge of the staff responsible for preparing it at the time of preparation. Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.

Paul Severin

Paul Severin has worked at Erste Asset Management since April 2008. Until 2012 he was responsible for the company’s product management; he has directed communications and PR activities since April 2012. From 1992 to 2008, he was director of equity fund management and deputy director for institu...

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