Cooperation by investors is OK, says the FSA.

TM’s recent post below “Engagement is the new black” missed a word in its title: collective. The announcement yesterday from the Financial Services Authority helpfully clarifies the rules of engagement covering cooperation between activist investors.

Investors can work actively together under certain conditions – especially on governance issues - without falling foul of European Union and UK rules against market abuse and acting in concert. But investors cannot trade on information they may gather while working together.

The recent FRC consultations on the Combined Code, and the Walker review have both encouraged institutions to engage with banks and other companies. However there had been concerns that collective engagement risked breaking MAD rules, as well potentially as the DTR rules on shareholder disclosures, including those newly issued on CFD disclosures.

A few questions arise; will these clarifications create a marked increase in engagement at all, let alone collectively? Probably not; long investors tend to have their own policies, which are unlikely to change, blandishments from the activist community notwithstanding.

Nonetheless engagement on ‘governance’ issues is clearly on the rise. One of the challenges for IR teams is in the extent to which they are part of the governance information chain. Many UK Plc boards regard this as a subject for them, not the traditional IR processes.

Get your retaliation in first, as a great Irishman once said. Avoid governance issues arising in the first place; however, companies broadly are not always brilliant at communicating around governance issues. A look at the annual reports of many companies for instance will show a marked reliance on the ‘compliance with DTR 7 and the Combined Code’ approach, and little on their use for wider communication.

For example, few use the (mandatory) board evaluation process to highlight what the board is working on. Few find ways of explaining the decision making processes and avoiding group think. And even fewer add colour to the succession and board composition processes. A notable exception to this is the latest report from Marks and Spencer, a report which raises the bar on governance communication.

More to do on disclosure of climate change policies by companies.

Yet more pressure on investors to persuade companies to toe the line, this time on climate change disclosures. Inevitably, the burden of communication will fall on those responsible for investor communication.

Eiris, the provider of research into the social, environmental and ethical performance of companies, has just updated its 2008 work critiquing the identification, mitigation and communication of climate change impacts. It concludes that while corporate commitment to mitigation has improved, unmitigated and undisclosed risk is still unacceptably high.

First the good news: The report found that of the 300 companies analysed, over half have short-term targets on climate change, and 91% of high impact companies disclose absolute CO2 or greenhouse gas emissions data. High impact sectors are defined by the report as chemicals, construction, electricity, food, industrial metals, mining, and oil and gas.

However, for indicators such as governance, strategy, disclosure, and performance, the report found that over a third of the 300 companies analysed continue to carry unmitigated climate-related risks. To be sure, short-term emissions reduction targets are there, but looking further out it is harder for companies to adopt long-term strategies – and communicate them, possibly because governments have yet to adopt regulations for emissions reductions.

And it places the burden – again – on the shoulders of investors. The report suggests "Investors must understand the impact these issues will have on their portfolios and integrate climate change into their engagement strategies or when exercising voting rights. The more companies are doing, the less risk investors are incurring. We suspect that investor activism has had an impact on companies addressing more of risk."

And board remuneration should be linked to success. According to the report, “only about 20% of companies incentivise management attention to climate risks, so activist investors should engage with companies to ensure that management structures do so”.

With pressure on investors from reports like this, and from the upcoming Copenhagen climate change meeting, IR professionals may want to be ready with the answers.