Dominique Blanc and Samer Hobeika discuss the French approach to shareholder engagement
Engagement does exist in France. Novethic has found it inside the 90-plus% of SRI assets subject to ESG best-in-class approaches. The French SRI market is a very dynamic one - as at end 2009, it weighed in at a strong €50.7bn, up 70% from 2008. Still, asset managers stated that ‘active ownership' practices applied to almost half their equity assets, engagement as defined below was really confined to two funds with €30m in assets.
Shareholder engagement refers to investors taking a stance on ESG issues and requires that the companies in which they invest improve their practices. These requirements take the form of a structured approach based on direct dialogue with the company and long-term monitoring. Investors can use different tactics if the dialogue approach does not prove effective - public disclosure on the progress of the engagement approach and the company's shortcomings on extra-financial issues, impact on management that may go from a freeze to divestment, or the exercise of shareholder rights, ie, questions in general meetings, voting against proposed resolutions, support or filing external resolutions.
In France, active ownership is a largely common practice, especially among asset management firms. These firms have a legal ‘comply or explain' obligation since 2007; they need to vote in general meetings and explain their votes, or justify the cases where they did not cast a vote. This has led to a surge in voting rates, as well as a rise in votes against resolutions. The French asset management association (AFG) showed in a survey that its members voted on average against 18% of the resolutions in which they participated; this rate climbs as high as 42% for engagement forerunner Phitrust Active Investors. French asset managers therefore often rely on proxy advice such as that of independent specialist firm Proxinvest, and also on recommendations from AFG or CIES, a group of unions involved in employee savings schemes.
However, active ownership in France often stops there, which sheds the light on what we could call the French paradox. On the one hand, SRI in France is growing fast and the prevailing best-in-class approach is spreading in the mainstream as financial management is integrating more and more not only on governance factors, but also on environmental and social issues. On the other hand, SRI à la française faces multiple challenges in a context of internationalisation, as French signatories of the UN Principles for Responsible Investment (UN PRI) are confronted with a framework and terminology of Anglo-Saxon inspiration, and international consultants, often working for large UK or Nordic pension funds, expect structured engagement practices from tender respondents.
French investors still often associate engagement as it is practiced in the UK with activism in its militant meaning. They deem engagement practices, such as communicating their expectations to issuers or reporting publicly on these demands and their results, as counterproductive since they may breach the trust relationship with companies.
Two things must be kept in mind on this aspect. First, their institutional clients are rarely explicit on engagement; even the most responsible asset owners are still focusing on the progressive increase of their best-in-class assets. Second, conflicts of interests are not to be minimised: asset management firms are often subsidiaries of large banking or insurance groups, whose clients include companies that are potential targets of engagement; thus signals sent by the parent company may affect the expectations carried by SRI analysts. Moreover, even in the absence of such signals, asset managers may be involved in savings or pension schemes with listed companies, and may not want to jeopardise this commercial relationship by criticising these companies. Therefore, engagement challenges the theoretical ‘Chinese wall' between asset management and commercial activities, and often highlights its porous nature.
In this context, the number of shareholder resolutions in France remains extremely limited, a fortiori on ESG issues. Companies even collaborate to deny outright the few attempts to register resolutions on governance, as was the case in 2009 when Phitrust Active Investors, through the French fund Proxy Active Investors, was three times refused the right to submit resolutions at the general meetings of Sanofi-Aventis, Cap Gemini and Total, all drafted under the same terms. The resolutions requested shareholder approval of the remuneration of the non-executive chairman.
Despite these obstacles, engagement is starting to move forward in France. Tricolore Rendement, Edmond de Rothschild Asset Management's €2.5bn French equity fund, recently adopted such practices, and will hopefully carry out visible engagement steps towards large French companies, in accordance with the policy publicly displayed to its investors.
Furthermore, Phitrust, along with the support of other investors, is working to file an environmental resolution, a first in France, at Total's general meeting on 13 May 2011 in partnership with Greenpeace France and the Natural Resources Defense Council, a US-based environmental action group. Similar to those filed by FairPensions in the United Kingdom at BP's and Shell's general meetings, the resolution is expected to request further disclosure from Total on the environmental and social risks involved in its tar sands projects in Canada and their long-term financial impact.
Engagement is thus definitely a phenomenon worth following in the coming years in France. Asset management firms are getting caught up in the game, and we can hope for an increased involvement of institutional investors. The UK Stewardship Code, an initiative launched in 2010 by the Financial Reporting Council, encourages signatories to disclose their policies on voting, engagement and conflicts of interest, to monitor investee companies in order to determine when engagement practices should be implemented, to establish guidelines when dialogue fails and to report on voting and engagement on a regular basis.
Although the code was criticised for its leniency and lack of verification process, such a tool could very well be adapted and adopted in France, or even on a European scale; this would lead asset managers beyond their regulatory voting obligations towards a wider engagement approach, while extending the perimeter of application to institutional investors. In a country where best-in-class approaches are prevalent, the development of engagement would truly challenge companies and raise their awareness on the importance of ESG issues.
Dominique Blanc is head of SRI research and Samer Hobeika is a member of the SRI research team at Novethic. Novethic's study ‘Shareholder engagement: a promising SRI approach' is available at www.novethic.com