Dialogue is not just a luxury – it's a vital part of the investment process, according to Portfolio Manager Rosl Veltmeijer and Head of Research Henk Jonker. "Engagement begins from the moment we consider investing in a company. Dialogue and transparency are so crucial that companies unwilling to engage are not considered for investment."

The screening process of listed companies by Triodos Investment Management (Triodos IM) is guided by strict principles to guarantee only companies that significantly contribute to a sustainable economy become part of fund portfolios. It’s more than just a snapshot; it’s an ongoing process that evaluates factors like the future impact potential of a company.

Understanding a company is key to investing in it, says Veltmeijer. "We achieve this through analysis and engaging with management. In that sense, engagement is integral to our selection process, even before we use it to influence a company's policy." This way, engagement serves a dual purpose: maximising a company's positive impact and comprehending its business model.

"Dialogue begins with our initial analysis and evolves as the company remains in our portfolios," agrees Jonker. "We need to ascertain if a company is willing to provide the necessary information and transparency, both now and in the future. Without this willingness, we choose not to invest."

Setting the agenda

When setting the agenda for positive change, engagement and voting are crucial tools. Both have distinct advantages and integrating them enhances the impact and clarity of shareholder intentions. Engagement provides a platform to address a wide range of concerns through informal discussions, formal meetings and collaborative efforts with other investors. Voting allows shareholders to exercise their vote at shareholder meetings and hold management directly accountable. However, Triodos IM prefers to wield its influence using engagement, says Veltmeijer. "Through engagement, we can set the agenda, advocating for issues we deem crucial. At a shareholder meeting, however, the agenda is predetermined."

Veltmeijer: "Dialogue often holds great importance for us. Our voting impact as a minor shareholder is limited. To ensure that our vote is fully heard by the company, we always communicate our voting intentions to the company in advance.”

Climate, renewable energy and biodiversity are important topics for Veltmeijer and Jonker, as are issues such as work-life balance. Jonker: "A lot is also driven by what is going on in the companies in our portfolios. But our own convictions play a crucial role too. Animal welfare, for example, is an important area where we stand out. Not many other investors are currently prioritising this theme. So, we do a lot of solo work on this. For other themes, we try to engage with companies in cooperation with other like-minded investors." 

Another focal point for Triodos IM is corporate governance, specifically executive remuneration. Jonker: "We monitor a set of criteria annually to evaluate the structure of executive compensation in companies with excessive remuneration practices. Most companies in our review have shown progress. Companies that don’t demonstrate progress on this topic, or other important topics, could become a candidate for exclusion. "

The impact of engagement

Engagement takes time. Steering companies towards a more sustainable trajectory can take years. Sometimes it succeeds, and sometimes it doesn’t. If we don’t see progress, this could result in divestment. Veltmeijer offers a more nuanced view on engagement: "You start engagement by asking relevant questions. Such questions can lead to awareness and thus policy changes. Ultimately, this is up to the company itself and the people working there. However, good questions set things in motion. If you achieve that, you can consider the engagement a success."

Jonker believes engagement can yield quicker results with smaller companies. "Thanks to Triodos IM's rigorous selection criteria, our investments are already in highly sustainable companies, reducing the need for major changes. However, even these companies can have practices that don't align with our policies. For example, we invest in Euglena, a company that produces raw food materials. Even though the company is legally required to test on animals, this is still at odds with our stance on anti-animal testing/animal welfare, so then you start talking." This dialogue led to an annual report in which the company outlined its policies and plans in this area. "While it is a step forward, our ultimate aim is to end animal testing", Jonker notes, "so this engagement issue remains open."

Triodos IM continues its fight against the use of hazardous chemicals. Veltmeijer: "We joined a collaborative engagement in December 2021 to encourage chemical companies to phase them out, and transition towards more sustainable solutions. As part of this project, last year we engaged with chemical companies Evonik and Shin-Etsu about phasing out PFAS, a highly toxic substance. They are willing to enhance their strategies and improve transparency. We will keep engaging with them on this theme.”

The mutual benefits of engagement

Successful engagement starts with the notion that dialogue must always be mutually beneficial. "It is important to ask relevant questions that also matter to the company. What helps is if you can share insights or best practices that the company itself does not have," says Veltmeijer. 

Jonker cites an example of manufacturers specialising in water treatment. On paper, these companies appear to have high water consumption, yet they convert polluted water into clean water, contributing to sustainability. ESG data providers often overlook this, which negatively impacts the water companies’ ESG scores. The data providers just assume high water consumption, without the water companies being aware of this.

Jonker: "Thanks to our initiative and that of other investors, these companies are now collaborating to improve their reporting methods. This is crucial in an increasingly data-driven investment industry. Data must match reality, and we help companies to make sure that this is the case."