This year marks the 10th anniversary of Engagement International. Here, the founder and CEO Erik Alhøj shares a personal story reflecting on 23 years in responsible investment and a decade with Engagement International.

Most people remember 2001 as the year of the horrible 9/11 terrorist attacks that changed the world. To me, it was also the year I made a significant career shift —from working as a financial reporter and editor to the first full-time employee in Denmark working with the new phenomenon — Responsible Investments.

At that time, CSR was implemented by only a few of the largest Danish companies, including Novo Nordisk, Grundfoss and Danfoss. However, on the investment side, nearly nothing had been done. A few pension funds and banks had started to create exclusion lists, consisting of companies involved in “sin activities” like weapons, tobacco, alcohol, and gambling. Occasionally, investors would inquire if they had an ethical policy, and sometimes whether contamination, child labour or human rights’ violations in general were mentioned.

I was hired as the Danish CEO of the Swedish pioneer Caring Company, which later became the leading Nordic Responsible Investment provider GES Investment Services, now part of Sustainalytics. In the early years, I noticed little interest from Danish institutional investors. They were quite understandably first and foremost focused on managing financially safe in a fast-changing world. However, I survived with some interest from a few pioneers, including the Danish asset owner Sampension and asset manager Nykredit, who recognised the value of this new concept early on.

In addition to the screening out of companies linked to the traditional “sin activities”, the “Scandinavian Approach” emerged with focus on divesting from portfolio companies violating international norms and conventions, covered by the UN Global Compact principles. It was quite different than the leading approach e.g. in France, of investing in best-in-class companies regarding CSR values like human and labour rights and environmental issues.

More and more institutional investors liked the idea of implementing “non-financial considerations” and “stakeholder value” rather than focusing solely on shareholder value as the guiding principle for their investment strategies. However, they didn’t like the long exclusion lists of no-go investments that we recommended them to follow. It reduced their investment universe and thereby their chances to generate the highest possible risk-adjusted financial returns, which were required by the financial authorities and also by most of their own pension savers.

The birth of Engagement

Hence, many investors became very satisfied to see that the new Principles for Responsible Investment (PRI) founded by UN Secretary-General Kofi Annan in 2006, recommended an alternative to exclusion and divestment, namely active ownership with controversial portfolio companies in terms of Proxy Voting and Engagement Dialogue. However, this also sparked the almost “never-ending discussion” between NGOs, investors, and service providers regarding the pros and cons of divesting or engaging with the controversial companies.

Personally, I became so fascinated by the concept of engagement dialogue that, after 13 great years with GES, I decided to say goodbye and, in 2014, founded a startup company, Engagement International ApS, together with a few good colleagues.

From the start, our vision was to: 1) Focus on Engagement Dialogue with listed companies, as it could be conducted by a handful of experienced Engagement Managers; 2) Purchase ESG research from some of the world’s largest providers, as it required economics of scale and many people to cover more and more ESG issues, companies and asset classes; 3) Operate truly globally from the very beginning when it came to engagement managers, the companies we engaged with and the institutional investor clients we engaged on behalf of; 4) Remain independent by not investing ourselves; and 5) Adhere to international norms and best practices including not at least PRI,  while providing flexible solutions to our investor clients.

New ways to engage

From the very start, we were happy to collaborate closely with MSCI ESG Research on ESG data and Minerva Analytics on proxy voting —both of whom remain our valued partners. However, our work for investor clients has evolved in two significant ways since then.

Initially, our screening of client portfolios and subsequent engagement dialogues focused on violations of international norms and conventions covered by UN Global Compact. As these considerations were quite new to most investors, we identified numerous very severe incidents regarding child and forced labour, labour rights, environmental disasters, corruption and bribery etc. Now, with generally more responsible investor practices and “healthier” portfolios, it is much more seldom to identify new cases of very severe violations in our clients’ portfolios to engage on. Hence, there is now more “space” to expand our due diligence screenings and engagement dialogues to proactively include many other ESG issues.

The other major difference between our work in 2014 and now is that we offer our clients a wider range of engagement levels. In the early days, before we adopted platforms like Teams and Zoom, most engagement dialogues were conducted through face-to-face meetings all over the world, supplemented by quite primitive conference calls. However, the COVID pandemic and rapid technical developments showed us that it wasn’t necessary nor responsible to rely on high-emission air travel, when it was possible to have quite effective video meetings via Teams and Zoom.

Although we have always preferred to actually meeting company representatives with a strict agenda biannually, we have now realised that it also sometimes can be meaningful in terms of costs and efficiency to supplement the video and face-to-face meetings with written dialogue through email correspondence. Typically, it works when the engagement agenda is relatively simple, and it is preferred by our clients to reduce costs per engagement dialogue, allowing them to allocate budgets toward more engagement cases. Due to this we now offer our clients a range of five engagement levels tailored to different engagement categories.

Climate engagement—a new priority

In 2016, shortly after the signing of the Paris Agreement, we supplemented our engagements on UN Global Compact cases with climate engagement. A year before the founding of Climate Action 100+, we started to engage with what we called Climate Top100 companies, defined as the 50 companies with the largest potential emissions from fossil fuel reserves and the 50 companies with the highest current Scope 1 and 2 emissions. The identified companies were mostly coal, oil and gas, utilities, steel, and cement producers. Due to our process, we can now show our clients a very long track record of 15–20 biannual engagement meetings and reporting’s with companies like Shell, RWE and Heidelberg Materials.

The facts that emissions are typically concentrated on a relatively small number of high-emission companies, and that Scope 3 emissions often are even more important than Scope 1 and 2 emissions, led to the development of our Climate Top1000+ Laggards engagement solution. The framework was created in close collaboration with clients. Here we identify companies for engagement in client portfolios that 1) are among the about 1,000 companies within the nearly 10,000 in our standard investment universe, MSCI ACWI IMI, that collectively account for 80–90% of the emissions from all the companies, and 2) despite their very high climate risk exposure demonstrate a very low management level regarding basic milestones like Net Zero commitment, emissions reduction, and disclosure.

The engagement goals of these two climate Net Zero approaches are to push for emission reductions “in the real world”. A third approach, Climate Top70% Engagement, has the goal of reducing the carbon footprint in a particular investor portfolio. Here we identity and engage with the portfolio companies that are generating at least 70% of total GHG emissions from all portfolio companies in 10 high-impact “hot industries”. The investor-financed emissions from each equity or corporate bond in the portfolio are calculated by multiplying the emission intensity, or emission per invested 100 USD (EVIC), by the amount invested in each security.

The Climate Top70% Engagement approach has been recommended by several norm-setters, like the Institutional Investors Group on Climate Change (IIGCC) and other supporters of the Net Zero Investment Framework, the globally recognised and most used climate framework. It provides recommendations of milestones and definitions that we at Engagement International follow as closely as possible in all our climate engagements. Due to this, we can supplement the climate engagements that many of our clients already undertake through CA100+ or IIGCC.

Our latest development in the climate area is the Net Zero Engagement with Banks, based on the framework of Transition Pathway Initiative (TPI), of which we are a supporter.

Responsible Tax as an important ESG issue

Since 2018, we have engaged on responsible tax—a corporate governance issue we believe should be treated like other ESG issues, including bribery and corruption. We agree with our clients that all companies with a positive profit at least to some extent should contribute to the financing of schools, infrastructure, and public services from which they benefit. Hence, it is hard to understand why the issue is ignored by most investors, service providers, ESG regulators and norm-setters.

Our approach to responsible tax engagement is to identify “Tax Laggards” in clients’ portfolios that can be associated with significant tax-related controversies and/or have paid an average of less than 15% in corporate tax in cash over the last three years. Currently, we have identified 49 of these Tax Laggards within the MSCI World Index. Our goal in engaging with these companies is definitely not to pressure them into paying the highest possible amount of tax, but to adhere to five milestones/principles of responsible tax recommended by GRI and other norm-setters that ensure that the companies do not use controversial tax havens and are transparent regarding their payment of tax in all jurisdictions where they operate.

Finally, we can also assist our investor clients by identifying companies for engagement on other corporate governance issues, as well as Sustainable Development Goals (SDGs) or the EU Principal Adverse Impacts (PAIs), such as biodiversity, water management, gender diversity, etc.

Proxy voting as a form of engagement escalation

Our latest structured product development is “Joining the Dots” between engagement dialogue and proxy voting in collaboration with our partner Minerva Analytics. This approach aims to escalate engagement dialogues with companies that have shown unsatisfactory results by voting against the election of board members, climate reports, and strategies, etc. The other way around, engagement dialogue is a good channel to explain why certain investor clients have voted against the elections and proposals from the company board and management.

The next 10 years will present new development opportunities, challenges, ups and downs. After many years of continuous growth and progress we now see, especially in the US, a politically motivated fight against ESG and sustainability. The necessary climate regulations and initiatives to reach Net Zero emissions before 2050 also meet more and more critique, not at least from far-right wing political parties. However, I believe the ESG, sustainability and responsible investment movement will still be able to show its worth. And engagement will continue to be one of the main approaches.

As the founder, CEO and main owner of Engagement International, I want to take this opportunity to thank our great staff, board members, investor clients, partners, engaged companies, and other stakeholders for your efforts and invaluable support. I hope you are ready to join us for the next ten years.