Canadian Responsible Investment Conference Update: Divestment and engagement

by Farnam Bidgoli, Jantzi-Sustainalytics

Are there limits to corporate engagement? Well, sometimes. And it depends what you mean by engagement.

The final session of the 2010 Canadian Responsible Investment Conference was a spirited and frank discussion about the dynamics of corporate engagement and what one panelist called the ‘nuclear option’: divestment.

At the outset, several of today’s panelists explicitly stated they were averse to the use of divestment. Frank Coleman of Christian Brothers Investment Services, highlighting his organization’s role as a faith-based investor committed to speaking to the conscience of companies, put it most simply: “If we leave, who will replace us? How much social change can we provoke by walking away?”

Michael Jantzi, CEO of ESG research provider Jantzi-Sustainalytics, noted that the decision to use divestment didn’t necessarily sacrifice the chance to provoke change. Jantzi remarked that many companies do not want the reputational risks associated with being publicly excluded by investors, and therefore can be pressured using divestment. However, he concurred with the other panelists that engagement can also be an effective tool – as long as it is taken seriously and not used as an excuse to delay action.

What does serious engagement look like? Firstly, be realistic: all of the panelists agreed that they had to be selective as to what cases they choose to pursue, as engagement is expensive in terms of resources and time. Speaking about the TIAA-CREF’s recent divestment from companies involved in Sudan, panel member Stephen Brown noted that the divestment process lasted three years. After considering the issue of corporate involvement in Sudan, and concluding that oil companies were enabling the human rights violations in the country, TIAA-CREF initiated an extensive engagement campaign. This meant time, resources, and a commitment to dialogue with companies. It also meant an honest evaluation of the engagement outcomes, and the willingness to move to divestment when dialogue wasn’t working.

But it can’t only be about threatening divestment: investors must have an idea of the big picture and what they want to achieve through engagement. As Coleman noted during his comments, letters, meetings and research reports are not end goals in themselves.

Companies will appreciate this clarity. In pursuing engagement, investors should act as a strategic asset to the company, not fringe dissenters. This demands consideration on the part of engaged investors regarding the scope of what is viable. Asking Lockheed Martin to halt weapons production is not a realistic request, but asking for stronger risk management on deep water drilling is.

One way of understanding the limits of what is feasible is to collaborate with other investors. After one audience member asked the moderator, Gary Hawton of Meritas Mutal Funds, about the say-on-pay shareholder resolutions the fund has spearheaded, Hawton admitted that the fund had filed the resolutions after failing to garner responses from private dialogue with the companies. He went on to suggest that if there was greater collaboration between shareholders, it may not have needed to escalate to that point, particularly since Meritas quickly found there was significant interest from other investors. Engagement and communication between investors is therefore another important facet of a serious engagement process. Coleman later reiterated this point by calling for more cross-border collaboration between U.S. and Canadian investors.

In the end, the panelists all agreed that the questions of corporate engagement and divestment are not either/or questions: instead, they represent part of the toolbox available to investors. The decision as to what to utilize from that toolbox depends on what the goal of the investor is. And if there are "limits" to corporate engagement, they are conditioned on the objectives of the investor and the shape of the engagement process.

Farnam Bidgoli is a junior sustainability analyst at SRI research firm Jantzi-Sustainalytics.