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Switch on to engagement

Now it is established that socially responsible investment funds need not underperform, and often outperform, conventional funds, the attention of the SRI market is turning to a new subject – engagement.

Engagement can be defined as the process of encouraging and supporting companies to improve their environmental and social performance or “investing to make a difference”.

What does this mean? Is engagement just a marketing ploy to entice ethical investors into morally questionable stocks? Is it an easy way for fund firms without a track record in SRI to climb aboard the rapidly rolling bandwagon? Or is it a genuine attempt by fund managers to exert their influence to raise the environmental and social performance of UK plc?

I strongly believe engagement could become the latter. However, if it is to fulfil this positive potential, the assistance and critical scrutiny of the IFA community will be essential.

If IFAs and investors start demanding that fund managers back up their claims of socially responsible engagement with hard evidence, standards of engagement will be forced upwards with positive results. If no such action is taken, engagement might settle at a lowest common denominator position, as little more than marketing spin.

How can you sort the leaders from the laggards? To my mind, the engagement process has four basic elements, for each of which I have suggested one basic indicator of performance that all fund managers should be able to answer easily.


Effective engagement depends on setting realistic and tangible objectives and providing the necessary staff resources.

Instead of making loose commitments to “supporting rainforests” or “protecting dolphins”, fund managers should define practical objectives such as “to encourage energy efficiency” or “to support the development of codes of conduct on labour standards”.

These objectives are in the best long-term financial interests of investors as saving energy saves money and setting high labour standards reduces the risk of negative publicity.

Commitment indicator

How many members of staff are engaged full-time on research and engagement?


Although there are many ways of engaging companies in dialogue, I have yet to find a more directly effective one than spending an hour in a face-to-face meeting with company management perhaps at one of their company&#39s production sites.

Only through direct contact can one understand the strengths of a company&#39s envi- ronmental or social programme and suggest improvements.

Dialogue indicator

How many companies did you meet with to discuss environmental/social issues last year?


Reporting on the “results” of engagement activities is difficult but it is essential that SRI fund managers demonstrate that their engagement activity can make a practical difference.

Results indicator

How many companies improved their performance last year following your suggestions to them?


Of course, IFAs and investors can only make informed judgements about the quantity or quality of engagement if fund managers are transparent about their activities.

Unfortunately, only a couple of fund management houses currently produce engagement reports for investors and it may stay this way unless IFAs and investors start demanding hard evidence of activity to back up any engagement claims.

Communication indicator

How often do you produce an engagement report for your investors?

A role for IFAs

Over recent years, IFAs have got behind the advertising pictures of healthy dolphins and smiling children to identify which fund houses treat SRI as a serious proposition.

IFAs distinguish critically between fund managers who add value for investors by selecting well managed companies with strong environmental, social and financial performance and fund managers who treat SRI as marketing spin.

It is time for IFAs to separate style from substance again by asking SRI fund managers some tough questions about their approach to engagement. If IFAs can highlight the diff-erences between the leaders and the laggards, I am confident the City can make a real impact on the environmental and social performance of UK plc.


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