This is according to Philippe Desfosses, CEO of the €23 billion pension scheme for French civil servants ERAFP and former Modern Investor cover star.
Desfosses spoke to Modern Investor following the news that Norway's sovereign wealth fund is about to sue Volkswagen over the car maker's emissions scandal.
‘To engage legal action against a company you invested in might sound bizarre since if successful you will get money but increase in some way the ordeal of the company. It is the reason why it is so important to engage businesses and to draw red lines as soon as an issue is detected,' he said.
‘The right way to protect your investments is to set up an engagement policy, as ERAFP did a few years ago, and vote accordingly in the annual general meeting. The natural complement to that is a dialogue with the senior management in non-confrontational manner. Legal action is a last-resort move.’
Because institutional investors have a fiduciary duty to protect the assets that are the ultimate guarantee of the promises they have delivered, they should already have set engagement policies, Desfosses believes.
'Most of them will do so and the pressure will increase on the management of companies. Those managements should not forget that they are agents, and that institutional investors are the owners on behalf of their contributors or clients.’
He added that it is important to ensure that SRI approaches are applied across all assets. ‘Some asset owners claim that 5% are managed according to SRI criteria. But what does it say about the 95% that are left? Does it mean that 95% are managed in an irresponsible way?’