Engagement versus Exclusion in Public Markets for DC Schemes

Jul 25, 2022 | Member Blog, News

Elaine Alston, Managing Director, Relationship Manager, MFS International (UK) Limited 

The focus on sustainability across both the investment industry and around the corporate world has intensified significantly in recent years and in particular for UK DC Schemes.

There is growing concern that short-term-oriented corporate behaviour, driven perhaps by short-term-focused investors, is creating or at least exacerbating social or environmental stresses that threaten to undermine the very system in which they operate.

So how best can MFS, in our capacity as an investor in public markets on behalf of DC schemes and other investors, play our part in creating a more sustainable future?

Is exclusion the answer?

Building a portfolio comprising only “good” companies with strong ESG credentials and excluding everything else isn’t de facto a bad strategy. It seems logical to us that companies addressing real social and environmental needs should, all else being equal, have better long-term prospects than companies causing harm to either people or planet.

But all else does need to be equal. For example:

  • What if a company “doing good” is unable to deliver sustained profit growth because it has no enduring competitive advantage?
  • Even if it does have a lasting competitive advantage, what if your entry point is at such a stratospheric valuation that returns are likely to be disappointing?

In these cases, exclusion is unlikely to prove a good investment approach. We view exclusion as an abdication of responsibility, not the exercise of it. That’s because, in public markets, excluding companies passes the issues on to other investors rather than seeking to influence companies towards positive, long-term practices.

Engagement as a force for change

What can sustainability-minded investors do? Simply this — engage as proactive stewards of capital. Use the power of the capital markets as the point of leverage on which we can move the world.

We need to know our limits: We should not delude ourselves that we understand our companies better than the people managing them. However, as long-term investors we should make it clear where our priorities lie:

  • Expect companies to be managed for long-term value creation, not short-term profit maximisation.
  • Expect them to pay due care and attention to social and environmental externalities that could incur a material financial cost at some point down the line.
  • If constructive engagement bears no fruit, exercise our voting powers to force the issue.

Engagement and proxy voting are meant to work in tandem. Proxy votes, unlike engagement alone, can provide a measurable snapshot of investor sentiment and force the adoption of binding resolutions on companies not cooperating with investors.

While many activist investors are aggressive in their engagement strategies, the rise of collective engagement organisations has been driven by some of the largest asset managers and asset owners. Taking part in collective engagement gives both larger and smaller shareholders a powerful voice for communicating and influencing change.

We believe working together allows for a more efficient engagement process and encourages productive discussions on the issues at hand. Overall, collective engagement can lead to more effective, reasonable engagements that have the power to drive change in the real economy.

Aligning with clients on value creation

Most investors share a common goal: to generate strong, durable risk-adjusted returns. It is our obligation and fiduciary duty as investment managers to behave as long-term owners when we invest our clients’ assets.

To us, exclusionary policies limit our effectiveness and don’t help us achieve this goal for our clients. We believe thoughtful engagement and proxy voting practices are vital to encouraging long-term value creation and economic growth.

Key questions for DC schemes’ trustees to ask investment managers

  • How do you approach sustainability? Is it part of your investment process, or is it a separate product?
  • How do you determine whether an issue is material or not?
  • Do you exclude any companies or industries based on sustainability concerns?
  • Which members of your investment team have responsibility for looking at ESG factors?
  • Do you engage with companies to understand how they view ESG risks and opportunities?
  • Do you vote proxies in-house or outsource proxy voting responsibility?
  • What reporting and metrics do you provide to evidence your Stewardship activities?

To learn more about how Sustainable Investing works at MFS, please visit mfs.com/sustainability where you will find our latest Sustainable Investing Annual Report and TCFD-aligned Strategic Climate Action Plan.



Please keep in mind that a sustainable investing approach does not guarantee positive results and that all investments, including those that integrate ESG considerations into the investment process, carry a certain amount of risk including the possible loss of the principal amount invested. 

For institutional and investment professional use only. Issued by MFS International (U.K.) Limited (“MIL UK”), a private limited company registered in England and Wales with the company number 03062718, and authorised and regulated in the conduct of investment business by the UK Financial Conduct Authority. MIL UK, an indirect subsidiary of MFS®, has its registered office at One Carter Lane, London, EC4V 5ER and provides products and investment services to institutional investors globally.

The asset managers that make up the DCIF are committed to promoting investment best practice within DC pension schemes.