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April 2019

Active Ownership is making an impact!

Sustainable RE 2
When it comes to the concept of sustainable investments, many investors still only think of exclusions for the time being. However,the range of instruments has been greatly expanded over the years. Meanwhile, a best-in-class approach, ESG integration, sustainable thematic and impact-oriented investing complement the number of available instruments. Active Ownership is an instrument that has so far found less use in continental Europe, but is now enjoying increasing popularity.
Active owners improve the governance
Active Ownership comprises all activities of investors with the aim of exerting influence on the business of companies. As the previous chart shows, this can be done (1) in direct dialogue with the management of a company, (2) by contentiously examining controversial issues together with other investors (collaborative engagement), (3) by discussing potential regulations with political authorities and, of course, (4) by voting on agenda items at shareholder meetings. An important goal of Active Ownership is to improve corporate governance. This also tends to lead to better share performance and reduces the negative external effects of business practices on the environment and society.
Engagement increases performance
In an academic study based on data from sustainable engagements conducted in the USA between 1999 and 2009, it was possible to find a correlation with the performance of equities. Successful engagements were associated with positive abnormal returns, while unsuccessful engagements were not associated with additional returns. The study also found that companies with weaker governance were more likely to be the target of engagements. Successful engagements were again more likely if the company was struggling with reputational problems but had a higher willingness to change. Such changes improved not only environmental and social management plans, but also accounting issues. Collaborative engagement was identified as a clear success factor.
Regulatory pressure is rising
Following the introduction of the Stewardship Code in the UK in 2010 and the Swiss Ordinance on Excessive Compensation in 2014, both of which require a vote on the fiduciary duty of pension funds, the EU is now taking action as well. The recently adopted Shareholder Rights Directive (SRD) imposes far-reaching obligations on institutional investors. However, surveys show that institutional investors in EU member states are not yet sufficiently prepared to comply with the Directive. In this newsletter, we explain what we do in the area of Active Ownership and also describe what investors can do to prepare for it.

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