The “unintentional Stewardship Stampede” by asset managers to show high levels of engagement activity with their investment holdings in response to regulatory requirements, is at risk of driving down the quality of engagement reporting, WHEB Asset Management warns.
While it is welcome that investment managers have intensified their engagement activities and are showcasing their related disclosures, WHEB’s latest Stewardship Report says asset managers should take a pragmatic and outcome-driven approach to engagement.
Racheal Monteiro, stewardship and climate analyst at WHEB Asset Management, says:
“In recent years we have seen a huge shift in engagement. Rather than being considered a nice-to-have that is ancillary to asset management, instead it is being treated as part of the core client proposition.
“We are seeing company engagement evolve from basic data-gathering into interaction aimed at delivering real-world change. The quality and focus of reporting must also now step-up.
“Reporting the number of engagements is really just an inadequate proxy for the real purpose of engagement which is real-world change., This can be evidenced and reported on in terms of policies, procedures and ultimately performance that advances sustainability.”
Earlier this month, WHEB’s impact report highlighted concerns that “an excessive focus on engagement activity metrics… does not adequately capture the depth or nuances of meaningful stewardship that will influence real-world outcomes.”
Effective engagement for WHEB involves purposeful dialogue (bilateral or collaborative), a clear objective to address a material sustainability or governance risk/opportunity, and an identifiable outcome matched to the objective. It also differentiates between Product Engagement (aimed at increasing the positive impact associated with the target company’s products and services) and ESG Engagement (seeking improvements on traditional operational sustainability, social responsibility and corporate governance issues). See Table with stock examples, here.
WHEB has baked into its investment process transparently how it exercises stewardship responsibilities and the outcomes that are correlated with this engagement (see detail in the Impact Report chapter here).
Engagement Case Study: Intensifying Net Zero Carbon Commitments
A key focus for WHEB Asset Management’s bilateral engagement with all its investee companies is to get them to commit to Net Zero Carbon (NZC) targets.
A founding signatory of the Net Zero Asset Managers initiative in December 2020 (for the portfolio to reach net zero emissions by 2050 or sooner), the WHEB Sustainability Fund initially had only 10% of holdings with existing NZC targets and WHEB committed to increasing this to 50% of the fund by 2025, through engagement. WHEB reached this target early in 2022, with 55% of its investee companies having committed to NZC targets.
Seb Beloe, head of research and partner at WHEB Asset Management at WHEB Asset Management, says:
“One of the features of our portfolios is that a large majority of Scope 1 and 2 greenhouse gas (GHG) emissions come from a small number of companies. In fact, the top five emitting companies in our portfolio account for over 75% of the entire portfolio’s emissions.
“That means that in order to deliver significant emission reductions across the portfolio, we need these high-emitting companies to set NZC targets and reduce their emissions. This is where high-quality, sustained engagement over many years is so valuable. Deploying a mixture of voting rights and management dialogue, we know that influence from shareholders including WHEB is a significant factor in getting companies to set targets and implement strategies to deliver carbon reductions.”
View Engagement Case Studies Targeting NZC:
· First Solar – US manufacturer of solar photovoltaic panels
· TE Connectivity – US manufacturer of electronic components and wireless systems
