For the purposes of this response, we are classifying “engagement activities” as those with companies where we have a specific objective for change at the company or particular issues we want the company to improve on. We will also see other companies to discuss issues of a strategic (including ESG) nature where it is not relevant to have specific engagement objectives. In 2019, our stewardship team, EOS, engaged with 1,043 companies on 2,854 environmental, social, governance, strategy, risk and communication issues and objectives.
Our stewardship team conducts engagements using specific milestone-driven objectives for most companies in its engagement program.
We annually review, develop and publish a rolling three-year engagement plan. There are many companies with which we will engage through the year that sit outside of our formal engagement plan; these will relate to issues around voting at general meetings, as well as in reaction to events that cannot be predicted in advance. With respect to the companies globally within the engagement plan, in line with clients' wishes, EOS' intensive engagement will focus on the largest aggregate holdings, the egregious issues and where there is a higher likelihood of results from more intensive engagement. There will be companies on the engagement plan that have no explicit engagement objectives but may instead be engaged on particular issues.
The reason for interacting with other companies may be to simply ensure that the largest aggregate client holdings are covered by stewardship activity and thus subject to regular monitoring. We will only set a specific engagement objective when it is relevant to do so. It is a relevant and important stewardship activity as a responsible owner to engage with the company on relevant ESG and other issues.
Those companies with more material environmental, social and governance issues and/ or a greater potential for change are engaged with more intensively, using the following categorization:
Tier 1 - Companies that typically represent more material client holdings in terms of value, have significant environmental, social or governance issues and have the potential for change through engagement. We plan for a minimum 5 interactions per year.
Tier 2 - Typically large companies with less serious risk profiles, which justify setting a number of engagement objectives where success may be achieved with less frequent interaction. We plan for 3 to 5 interactions per year.
Tier 3 - Companies representing significant client holdings but with generally lower risks so that we focus on engagement issues, instead of setting specific engagement objectives. We plan for 1 to 2 interactions per year.
Measuring and monitoring progress on engagements is carried out by setting clear engagement objectives and systematically using the system EOS pioneered of measuring progress against four milestones. These are:
- the raising of the issue with the company or other relevant third party, (Milestone 1)
- recognition by the company or relevant third party that the concern is valid, (Milestone 2)
- a plan to address the particular issue and (Milestone 3)
- successful delivery of the objective. (Milestone 4)
We consistently review the progress we are making against these objectives, and our proprietary engagement database allows us to maintain a clear record of our activities and progress consistent with our four-step milestone approach.
We escalate the intensity of an engagement activity over time, depending on the nature of the challenges each company faces and the attitude of the board towards our dialogue, and as a result a company's intensity tiering may change. Some engagements may involve just one or two meetings; others are more complex and will entail multiple meetings with management and board members over several years. Such activity often requires persistence.
To maintain the quality of our engagements we have established a quality assurance program through which three directors hold regular sessions with each engager to review and challenge the quality of their engagements.