Our Approach to Engagement
Element Investment Managers engages with the management of the companies in its portfolio on material issues (including Environmental, Social and Corporate Governance issues) in order to:
Enhance the long-term performance of these companies
Meet our fiduciary responsibilities as investment managers
Benefit broader society as the company includes sustainability issues in its long-term objectives
Source: CFA Institute
It is clear that by addressing a potential risk in its early stages, a company has more options on how to approach and manage that risk. The longer time elapses, the fewer and more expensive the options become that are available to management (as highlighted in the chart above). If management understands the long-term sustainability issues facing its company and is pro-active in the disclosure and management thereof it can reduce the long-term risk of the business for investors.
Corporate Governance is central in reflecting the quality of management processes. Stakeholder relations are central to reputation, risk management and the long-term success of a company. This can be derived from many sources- employee relations, community relations, impacts on surrounding environment, health and safety practices, customer satisfaction and regulatory authorities. When these relationships break down, company reputation and investor wealth can be eroded as increased costs can manifest in a number of ways: litigation, fines, environmental rehabilitation funds, strikes, loss of productivity and loss of customers.
By enhancing the understanding of sustainability risks, Element Investment Managers seeks to ensure that potential future loss of value to investors can be minimised.
Our process of engagement with company management is preceded by detailed research on the material issues as well as the international best practice approach to resolving them.
Voting on all company resolutions
Element Investment Managers votes on all resolutions at all General Meetings in the companies in which it invests on its clients’ behalf. International research has highlighted that one of the most significant factors linking corporate governance and company performance is the process of active ownership, rather than companies’ compliance with codes. Corporate abuses are more likely to occur within an environment of shareholder apathy – something that is always highlighted after every investment bubble has deflated.
The basis for how we vote at a General Meeting is guided by our Voting and Proxy Policy.
ESG research forms an integral part of our investment process.
Where the research is of a particularly specialist nature, we have, and will, outsource the research to industry experts. Examples of this are detailed research reports into Mine Safety as well as the long-term risk of Skills Shortages in Mining. Both of these are long-term secular issues that could have material valuation impacts if not addressed timeously by the Mining companies themselves.
In addition, from time to time, we prepare research papers to guide our engagement with companies on certain key issues. In the past this research has included:
Social, ethical and environmental reporting
Black economic empowerment
Disclosure practices for directors’ remuneration
Global climate change
Priorities for engagement
Our focus at Element Investment Managers is to engage with company management on issues that are material and relevant to a particular company on a case-by-case basis applying global best practice to our engagement process. Our Investment Committee provides input on a number of issues inter alia:
Review of engagement case studies and voting policies
Determining priorities for engagement for particular companies
Suggesting approaches to engagement for particular companies
Engaging with company management
The objective of engagement is the creation or protection of long-term shareholder value. The emphasis of engagement is that it should be constructive both in the interaction that we have with company management and in the issues that we are addressing. Shareholder activism and constructive engagement have been shown internationally to add value over the long term through either improvement in the investment ratings of the underlying companies or a reduction in the cost of capital as risk issues are addressed.
In the event that we are unable to achieve our goals during the course of constructive engagement, we will assess the materiality of the issue being addressed and if it is likely that management inaction could result in a loss of long-term value to investors, we will consider mobilising shareholders (as a last resort) to:
Remove directors, or
Propose a special resolution to effect change in a company