How we engage with our investees to build a better future

At Allianz Investment Management (AIM), which steers Allianz’s 750 billion USD proprietary portfolio, a large portion of this is taken on through corporate engagement. This is run by Patrick Peura, Head of Investment Stewardship and Engagement.

In the following interview, Peura gives a look under the hood at how engagement works, what it aims to achieve, and how it forms a key element of AIM’s sustainable investing strategy. He also addresses a key question: to what extent can companies be expected to address the challenges of our time and what else is needed to drive more action?

Sure. Corporate engagement refers to the collaborative exchange that we enter with companies in our portfolio. It intends to encourage and support them in addressing sustainability risks and opportunities in their operations. This is an important way to directly represent the long-term interests of Allianz’s clients and beneficiaries. 

The engagement process starts by systematically identifying sustainability risks and opportunities faced by the companies in our portfolio and developing an understanding of the context in which they operate. Generally, we then initiate dialogue through a formal written request, asking the company to address the topic of opportunity or concern. 

This process supports the people and teams within the company who are often already working hard on the topics we’ve identified. We are effectively acting as a catalyst for the company in addressing our concerns. Engagement conversations can span months or even years as we continue to monitor the progress of companies across their reporting cycles.

Healthy economies, functioning societies, and the prospect of a prosperous future are beneficial to everyone, including us as investors. As a result, addressing sustainability risks and opportunities in our portfolio is crucial to making better investment decisions and improving the performance of our investee companies. When our portfolio companies emphasize creating value for their stakeholders, they are better positioned to generate sustained, long-term business success and to deliver stronger results.

Within the context of increasing societal and regulatory pressure to limit harmful externalities, such as carbon emissions or negative impacts on communities, we believe that companies that manage their externalities best will be rewarded by others in their supply chains, their customers, and society in general.

Simple: companies and investors are interested in understanding how our interests overlap and how to execute effectively in these areas. What benefits us as long-term investors is often also good for the company itself. Sometimes they just need further justification to prioritize topics that pay off over longer time horizons than often cited.

In addition, within an individual company we are often supporting those stakeholders who are already pushing for improvements, be that sustainability leaders, senior management, or board members. In most cases, investee companies appreciate our perspective and expertise. We’re essentially offering free consulting – and who could say no to that?

We most often focus on environmental and social issues like human rights, health and safety, or toxic emissions and waste management. 

These are called idiosyncratic issues because they pop up with little correlation to other events across our portfolio. Even companies that are leaders in some areas may face challenges in others. For instance, a mining company crucial to the energy transition might have a problem managing its impacts on a local community or biodiversity.

Traditionally, diversifying our investment portfolio has helped us manage the visibility of these risks on our overall return since a negative event on one side of our portfolio could be offset by a positive on the other. But this is not enough for us. With such a large portfolio of companies, even a “once-in-a-hundred-years” catastrophe could occur multiple times per year. By engaging with companies, we help them address these risks proactively.

Systemic risks are issues that affect companies across entire sectors or geographies, are correlated to each other, impact investment returns of the entire market, and are thus ‘undiversifiable’. Climate change is perhaps the most prominent example, as the physical and transition risks from climate change are prevalent and intensifying around the globe. Since diversifying doesn’t sufficiently protect against systemic risks, we address them at their root, often through multilateral initiatives like the U.N-convened Net Zero Asset Owner Alliance (NZAOA), of which Allianz is a founding member.

The NZAOA now has 88 asset owners with 9.5 trillion USD of assets under management, who have committed to align their portfolios with net-zero carbon emissions by 2050. One core commitment of the NZAOA is to use engagement to further our goal of addressing climate change in the real economy. The NZAOA has published significant thought leadership on what investors can do to drive decarbonization. At AIM we independently implement the published guidelines in line with our long-term interests.

Within the NZAOA, I co-lead the track focused on engagement activities with Jake Barnett from Wespath Benefits and Investments, headquartered in Chicago. Together, we have written extensively on engagement and how asset owners can further supplement their corporate engagement activities with other actions. I would encourage readers that are interested to delve deeper into how investors can mitigate systemic risks like climate change to read our paper, The Future of Investor Engagement: A Call for Systematic Stewardship to Address Systemic Climate Risk.

We have many specific examples where companies have instituted efforts directly in line with our requests: internal carbon pricing, exploring hydrogen production from electrolysis rather than natural gas, and restructuring human rights teams and governance to ensure global oversight. We have also helped companies develop net-zero commitments, gain safety certifications for processes like ISO14501, extend health and safety benefits to all workers on their sites, and commit to align their lobbying activities with stated climate commitments.

In addition to the NZAOA, we have seen success from multilateral initiatives like the Investor Mine Tailings and Safety Initiative. This was established following the catastrophic collapse of a mine tailings dam in Brazil, and it took a systemic look at the issue. Over the last several years, they have now created a common framework to address mining tailings safety worldwide. AIM has been a supporter and participant in this Initiative since its launch and continues to encourage companies to manage their facilities in line with the Initiative’s global standard. 

In many cases, however, success is less quantifiable but still incredibly important: we often hear from our counterparts at investee companies that our investor support was critical for them to build a case to address a topic of concern. Many times, this results in strategic changes that are not well measured by traditional KPIs.

What is more important than attributing our engagement efforts directly to a company outcomes is realizing that our work is part of a broader system. A business strategically responds to the interests of its suppliers, customers, employees, regulators, and investors – none of these alone drives all the change. Many inputs shape a company’s strategy with the goal of driving its success in the economy of the future.

Engagement alone isn’t a “sliver-bullet” solution that solves all problems. That’s why, for companies or sectors with risks beyond our comfort level, like coal, we have exclusions. We believe coal will become obsolete rapidly, and as long-term investors, we don’t want to risk our assets when that tipping point happens. Sometimes we also might get unsatisfactory responses from companies with whom we’d like to engage, which leads us to take a closer look and decide if it makes sense to continue investing in them.

In most cases, however, we recognize that companies facing sustainability problems also provide critical products and services for society. As a result, we are eager to support them in finding solutions. In these cases, engagement can effectively move these players across the economic playing field, within the bounds of competitive forces and the ‘rules of the game’. Not every company in every sector will be the top sustainability performer. This is why the minimum expectations, or the ‘rules of the game’, also require continuous improvement. Improvement can be driven by catalyzing best practices into expectations, economic policies, or regulations that reward companies taking action to improve their sustainability.

I am very optimistic, especially because I have observed and supported the positive changes that have come since I started AIM's engagement program in 2018. I believe there will always be a place for investors to express our long-term interests to companies and help expedite solutions to new problems as they arise. This means a progression from reacting to harmful events to developing best practices, which become expectations, then norms, and finally one day are new standards for an industry.

Whether we like it or not, we are stakeholders for our investee companies. Being silent means we let our interests go unconsidered, while also letting down those other stakeholders who have a similar interest in sustainability. Ultimately, our goal is for companies across the globe to stop having to say “never again” when it comes to poor performance or catastrophes. Instead, we want them to be able to say, “never at all.”