What is an engagement policy?
Engagement refers to the dialogue and influence investors exert over portfolio companies (PCs) concerning sustainability matters. This can be done through the use of various tools.
Engagement is a way for active investors to steer portfolio companies in the 'right' direction towards increasing their sustainability-related ambitions and considerations.
An engagement policy describes how shareholder engagement is integrated into the investment process, and sets practical approaches to be employed, as well as reporting and communication guidelines.
Do you need to disclose your engagement policy?
Disclosing your engagement policies is a requirement for Alternative Investment Fund Managing Directors (AIFMD) as stated in Article 3g of the European Shareholder Rights Directive II (SRD II).
The requirement works on a 'comply or explain' basis, and was transposed onto Dutch national law on Article 5:87c of Dutch Financial Supervision Act.
If you want to classify one of your Funds as an Article 8 or 9 product, you do need to set an engagement policy. This ensures you have a clear process for supporting your portfolio companies in achieving the sustainability ambitions you have set for your Fund.
'AIFM-light' managers controlling only Article 6 products are exempt from this requirement and do not have to disclose their policy online (but can if they wish to).
Build your Own Policy
As a starting point for your firm's building of an engagement process, you must lay down the approach you will take to implement the latter.
Your engagement approach should ideally be set in an 'engagement plan'. In building such a plan, you will be required to determine which companies you would like to engage with.
You will also need to decide on which tools you want to use to effectively engage with your portfolio companies.
Engagement Checklist
The following checklist allows you to get a comprehensive overview of the steps you need to take to ensure your engagement policies have been coherently designed.
Develop your engagement plan and collect internal approval
Define the scope of focus and any sectors that might be particularly involved or affected
Designate a scope of companies - you can engage with all companies, or only with certain companies which are particularly affected or opportunistic
Determine which engagement tools you will employ, taking into consideration the resources necessary for their implementation
Establish a way of initiating communication with the relevant companies
Design a clear plan to provide to the portfolio companies in question (including what they need to report on, and by what deadline)
Prepare processes to measure the outcomes or impacts of the engagement, and think about resource, time and staff allocation in advance
Once you have completed going through this checklist, you should be ready to publish your engagement policy and enforce it!
Keep in mind you should be as transparent as possible in building the policy.
It should be clear why you have selected these specific methods of management or performance monitoring, and how that will bring value for the corporation.
Customising your Engagement Plan to fit your needs
The first step in building meaningful engagement policies relates to the designing of an engagement plan to reflect the specific needs for engagement by your investment firm in particular.
This will require you to select the tools that best suit the needs of your investors and the objectives that they seek to achieve through such engagement with the portfolio companies.
A variety of tools have been developed to increase your investments' value and mitigate risks.
Engagement Tools
The following (non-exhaustive) list enumerates some of the most common such tools:
Active dialogue: having direct conversations with portfolio companies (and other relevant stakeholders) concerning strategy, marketing, innovation, or impact-related topics
Become the 'Impact Steward': support companies by exercising your role as steward and through supporting the development of the impact frameworks (theory of change, building of impact frameworks and policies, determining relevant KPIs)
Shareholder Collaboration: Collaborate with other, like-minded investors, companies and other stakeholders on engagement projects
Helping with talent building: involve your investment manager with establishing an employee participation plan and financial incentives for portfolio companies to ensure talented professionals are attracted and retained
Helping with governance building: involve investment manager with ensuring coherent governance structure within portfolio companies
Management of Crises: involve investment manager with providing support to portfolio companies which are dealing with an internal crisis (i.e., loss of senior management employee, design or development issues, loss or serious customer, etc)
Providing knowledge center: doing educational trainings and outreach with the marketplace, organising summits to identify and plan on how to reach important milestones, or sponsoring academic and other forms of research and analysis on specific issues, with the advantage of increasing market participants' awareness of the issue
How to choose Engagement Tools
To determine which engagement tools are correct for your firm's specific needs, a few questions can prove helpful to determine your strategy in starting the engagement with a specific PC.
First:
How do investors feel about the issue and industry?
Is there already engagement on the latter from other investors, do they share similar interests and opinions on the matter?
Collaboration in those instances can prove effective and simplify the effort needed from you as investment manager, but can only be established after careful consideration of the risks and opportunities associated therewith.
Next:
You should consider your relationship with the board of the portfolio company, and the latter's current acceptance of incorporating sustainability into its corporate strategy.
Do you have a good relationship with the board of the PC?
Then it might be a good idea to adopt a top-down approach.
Instead, is there already an internal staff member who is pushing for adoption of such measures?
Then, you might want to opt for setting up an initiative with more junior-positioned employees.
When deciding who the relevant person to begin engagement with is, it is important to consider:
i) the value you place on building long-term relationships with your PCs
ii) your envisaged holding period with them.
If you want to maintain a longer relationship with a company, you should try to talk to board management and adopt an engagement policy consistent with their views.
Engagement Policies in the PAI Statement
If you decide to opt-in for the Principal Adverse Impact framework, you also need to disclose relevant information concerning the presence of engagement policies.
This is because engagement policies are one type of 'action to be taken' to incorporate consideration of the PAIs into the investment strategy.
Generally, this would require you to write a short chapter within your engagement policy on how you will approach:
i) the PAI data collection
ii) how the results of the PAI indicators yearly will be assessed to identify need for further engagement
iii) the process for deciding on which companies to engage with and how
iii) how frequently and using which tools you will engage with the PCs on their PAI results.
And that's it!
Now that you know what an engagement policy is and how to set one, you can use our Engagement Policy template to build your own!
Once you have drafted it, you can upload it to the platform for us to review!