How engagement is carried out.
The choice of appropriate engagement techniques will depend on the asset manager's mandates and investment styles. In the equity asset management space, we need to make a distinction between active management and passive management.
Active management involves regular investment decisions where country, sector, or stock positions are determined to attempt to beat the market, whose performance is measured using a stock index as a benchmark.
Passive investing typically aims to deliver index or benchmark performance using a range of potential techniques to replicate or mimic the benchmark return and risk performance.
Passively managed portfolios can hold a large number of holdings, often hundreds of holdings, and individual stocks are not actively researched. Therefore, the most appropriate engagement for managers of passive portfolios is to focus on an issue that impacts a number of companies in the benchmark and engage with the senior managers of multiple companies by writing them a letter that sets out their concerns or suggested actions.
Engagement is more widely used in the active space, where the portfolios typically hold dozens rather than hundreds of stocks and where the analysts and fund managers analyze the sectors and individual companies at much greater depth. That enables them to identify issues on which to engage with companies and seek change in the issuer's approach, focus or policy. The most appropriate way to engage on a particular issue is typically to use one or a combination of the following strategies. Firstly, targeted letters. Secondly, private meetings, and this is often the most appropriate way of actually starting engagement. Finally, is the use of public engagement. That's making public statements via the media or at company and industry events, or even at conferences.
Another decision that needs to be made is who one should target for the engagement. Who should we send letters to or arrange meetings with? For business strategy and operational matters, the asset manager would usually approach the CEO or the CFO. For governance matters, the asset manager would usually approach the chairman. And for ESG operational issues, one would usually approach, firstly, the investor relations team and then senior management.
