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Level: Intermediate

Driving positive change: engagement or divestment?

Do investors engage the company about their concerns, or do they divest of their investment in the company? In this article, we explore the advantages and limitations of each

Environmental, social, and governance (ESG) considerations are becoming increasingly important to investors. When investors like Rest hold shares in a company, they can have a view on issues affecting the company and vote at shareholder meetings. Investors may also meet with the company and engage them on the basis of their shareholding.

When addressing concerns, investors have two key options to consider: engagement or divestment. Do investors engage the company about their concerns, or do they divest of their investment in the company? In this article, we explore the advantages and limitations of each, as well as Rest’s general approach as a responsible investor in the context of a shareholder of a listed company.

To engage or divest? When investors (including superannuation funds) choose to engage a company on ESG issues, they aim to encourage or help the company to improve its practices in line with the investors’ expectations. By contrast, divestment refers to selling shares (in part or in full) in companies that do not or cannot meet investor expectations concerning ESG factors, such as the company’s practices in relation to climate change and modern slavery. 

Divestment is not a quick fix

Some people think that divesting of a company’s shares entirely is the most effective way to bring about change. The belief is that withdrawing from an investment will put pressure on companies to change their processes and practices. However, this may be overly simplistic.

The financial impact of selling shares may not be significant enough to result in meaningful change. Moreover, divesting means a shareholder gives up any opportunity to meaningfully engage a company and bring about positive change. Another investor may then purchase these shares but not share the same concerns about the company’s approach and priorities related to ESG factors. This could mean that the company continues to operate as usual without continued investor feedback.

As such, divestment is typically a tool of last resort. An investor like Rest may choose to divest where it’s in the best financial interests of its members and when it believes that a company will not address the relevant ESG factors.

Investing for positive change

Superannuation funds like Rest can provide a view on a company's approach to and priorities in relation to ESG factors. Investors can evaluate a company’s management of ESG factors and encourage it to use practices that they believe preserve long-term value for shareholders. By remaining invested, superannuation funds like Rest can communicate their members' long-term investment interests to the companies they invest in.

At Rest, we believe that engaging companies as a shareholder on ESG factors is one of the most effective ways of protecting members’ interests. Engagement is therefore a key pillar of our responsible investment policy and strategy – we refer to it as “active ownership”.

Engaging companies on ESG factors takes time, and it may require several industry groups to collaborate on ESG factors to bring about improved outcomes. It can also take various forms, some of which we explain below.

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Proxy voting and shareholder resolutions

Voting at company meetings is an important part of being an active investor.

At shareholder meetings, shareholders may vote on certain matters, known as resolutions. Each matter calls for approval of a particular issue. (Shareholders who hold a certain number of shares may propose resolutions, and all ordinary shareholders have the right to vote on them.)

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Direct company engagement

This refers to direct discussion between shareholders and the company. It can involve meetings with senior management at the company or its board members. Direct engagement is typically available only to large shareholders and requires a high level of expertise. 

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Collaborative engagement

This is when investors share knowledge and pool resources with industry partners and other like-minded investors to provide a view on certain matters to companies. 

What if our engagement doesn’t work?

If Rest believes a company has failed to demonstrate sufficient change, we may consider further action, including:

  • voting against the election of board directors
  • voting against the remuneration report (salary packages of key staff)
  • collaborative engagement with other investors
  • supporting or filing a shareholder resolution
  • making a public statement about the company
  • divesting – as a last resort.

Any decision to increase our engagement efforts is made in line with our members’ best financial interests, taking into account the nature and significance of the issue.

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You can read more about how we incorporate ESG factors into investing on our website and in our annual supplement on responsible investment and climate change.

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