In an era where individuals are increasingly conscious about how their investments impact the world, ethical investing has gained significant traction. As financial advisers navigate this ever-evolving landscape, the need to align clients' investment portfolios with their values has never been more important. Beyond alignment, however, lies the crucial role of engagement—a dynamic process that empowers advisers to influence positive change and ensure the best investment choices for their clients.

The Ethical Advisers' Co-op (EAC) 2023 annual report serves as a valuable resource for financial advisers seeking guidance on engaging effectively in the realm of ethical investing. The report provides a wealth of information and insights into leading practices of advisers who specialise in providing ethical and sustainable investment advice. From shedding light on the companies of concern in a fund’s portfolio to highlighting the funds that are leading the charge, this report provides excellent examples of the ways advisers can advocate for sustainable investments on behalf of their clients.

Simply aligning portfolios with ethical values is just one side of the coin. More than ever before, engagement plays a pivotal role in driving positive change. Ethical investment advisers who understand this have an opportunity to make lasting impacts by actively influencing the finance industry, connecting on a deeper level with clients, and fostering meaningful progress towards a more sustainable future.

The importance of engagement

Active engagement plays a crucial role in ethical investing, going beyond traditional passive strategies. By actively participating in dialogue with company executives and portfolio managers, holding funds to account for shareholder votes that go against client values, and supporting clients in their own advocacy and proxy voting, ethical investment advisers have the opportunity to influence decision-making processes, encourage transparency, and improve the suite of sustainable investment products.

Engagement offers a proactive pathway to enhance an adviser’s client proposition and instigate real-world impact. "Co-op members have engaged with fund managers, companies, and organisations. Most often this involves discussions about ethical screening and exposure to companies of concern within a fund manager's portfolio," highlights the EAC annual report. Engagement is an effective way for advisers to advocate on behalf of their clients.

The power of engagement

The EAC annual report sheds light on the key areas of adviser engagement, showcasing how ethical advisers can drive significant changes:

• Market Forces led a shareholder resolution with Whitehaven Coal. Co-op clients participated in the resolution asking Whitehaven Coal to disclose information demonstrating how the company’s capital expenditure and operations pertaining to coal assets will be managed in a manner consistent with a scenario in which global energy emissions reach net zero by 2050.
• BetaShares consulted Co-op members for input on their screening and underlying securities regarding a new Sustainable Infrastructure Fund.
• Several proposals were put forward to the NZX (NZ Stock Exchange) Corporate Governance Code Review which were accepted and reflected in the revised Code that took effect on 1 April 2023.
• Members collaborated with Market Forces to engage with Australian Super on gaming divestment.
• Co-op members engaged with portfolio managers holding international shares to confirm which funds held Israeli companies, and the details of their exposure. Funds engaged include; Impax, Nanuk, Pengana WHEB, Generation Investment Management, Stewart Investors and BetaShares.
• Octopus Investments was engaged with on safeguards to protect Indigenous cultural heritage around new site developments.

These examples serve as powerful testaments to the efficacy of engagement in influencing the investment industry towards more sustainable outcomes. You can read the detailed engagement activities of the Ethical Advisers’ Co-op in their annual report.

Five essential questions for advisers

To maximise the impact of engagement, advisers should consider the following essential questions when interacting with fund managers:

i) What steps does your fund manager take to engage companies held in portfolios?

As an ethical investment adviser, it is crucial to understand how your fund manager actively engages with the companies held in their portfolios. This includes asking questions about their responsibilities in initiating dialogue, the frequency of engagement, and the preferred methods or platforms they utilise. By gaining insights into their approach to engagement, you can assess whether it aligns with you and your clients' values and expectations.

ii) Are there any examples where your interventions influenced company behaviour positively?

One of the key benefits of engagement is the potential to influence positive change within companies. It is important to inquire about any real-world examples where a manager’s interventions led to tangible improvements in company behaviour. These success stories demonstrate the effectiveness of engagement and provide assurance that efforts are making a difference. Including positive outcomes in client discussions reinforces confidence in their investments, strengthens client relationships, and can help provide peace of mind.

iii) How does your fund manager support shareholder resolutions related to ESG issues?

Shareholder resolutions play a significant role in addressing environmental, social, and governance (ESG) concerns within companies. To gauge your fund manager's commitment to sustainable investing, ask them about their involvement in supporting or voting on important ethical proposals brought forth by shareholders. Understanding their stance on such matters will help you determine whether they actively advocate for positive change.

iv) How do you ensure transparency regarding engagements and outcomes with invested companies?

Transparency is crucial when it comes to communicating engagement activities and outcomes with company holdings. Inquire about the strategies employed by your fund manager to ensure transparency throughout this process. Ideally, they should have clear mechanisms in place for reporting on engagements and disclosing progress made towards influencing responsible practices.

v) In what ways can investors access information regarding company engagement efforts undertaken by the fund?

It is essential for advisers and clients to have easy access to information regarding a fund's corporate engagement efforts. Ask about resources available such as reports or public voting records that provide comprehensive insights into the fund's engagement activities. Additionally, inquire about any online platforms or tools offered by the fund that enable you to track and monitor their progress in engaging with invested companies.

Through asking these five questions, you gain a deeper understanding of your fund manager's approach to engagement and can improve alignment with your clients' ethical values. This will empower you to make informed decisions as an ethical investment adviser and contribute towards driving positive change within the companies held in your clients’ portfolios.

Conclusion: the collective impact of informed engagement

The collective efforts of individual investors, advisers, and portfolio managers, engaging in meaningful dialogues, advocating for sustainability, and influencing corporate behaviours, delivers the potential to catalyse industry-wide shifts towards more responsible practices. By embracing the principles of active engagement, financial advisers can lead the charge in creating a future where investments consistently reflect the ethical values and aspirations of their clients, contributing to a more sustainable and equitable world for all.

By asking these five essential questions to fund managers, advisers can more effectively assess the sustainability efforts of the companies in which their clients are investing. This not only helps advisers make informed decisions, but it also sends a powerful message about the importance of ethical investing and what clients are needing from product providers right now.

Informed engagement is key because it allows advisers to understand where investment firms stand on important issues such as climate change or diversity and inclusion. Through dialogue with fund managers, advisers gain insights into holding companies' long-term strategies and objectives. Armed with this knowledge, they can choose investments that not only benefit their clients financially but also contribute positively towards creating a better world.

Let's not underestimate the power of informed engagement and the role it plays in shaping a more sustainable investment landscape. The Ethical Advisers' Co-op annual report not only underscores the significance of this engagement but also serves as a beacon, guiding advisers through the practicalities of making a tangible impact.

Want to learn more about the essential role of engagement in advice?

The Ethical Advice Accelerator is an on-demand course that combines comprehensive education with tangible assets to help you implement values-based advice simply and efficiently. You will learn about ESG, sustainable investing, how to incorporate values in your client fact-finding process, and the steps to match investments with your client’s ethical preferences. Plus, there’s an entire module dedicated to engagement and shareholder advocacy, so you will be prepared to actively engage with portfolio managers and support your clients in the best way possible.

Click here to say yes to your clients, yes to positive impact and yes to becoming an industry change-maker, by participating in this program intake.

Disclaimer:
This information is issued by Ethical Invest Group (EIG) (ABN 29 238 432 149) in relation to the trend toward sustainability in financial advice.
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