Written by Rachael Monteiro, Stewardship & Climate Analyst at WHEB Asset Management
Levels of stewardship activity have never been higher.
Published at the end of last year, the FCA’s Sustainability Disclosure Requirements (SDR) included a notable focus on investor stewardship for all four of its labels. Internationally, the Global Impact Investing Institute (GIIN) also recognises stewardship’s role in impact investing.
Since 2022, UK pension schemes with more than 100 members have been expected to state their – or their external managers’ – engagement policy and priorities and explain in detail how they steward their investments. This has encouraged underlying asset managers to develop their own policies and systems to meet these expectations. It is no wonder the 2020 UK Stewardship Code continues to gain signatories. Up from 236 at the end of 2022, and now standing at 277, 68% of these are asset managers.
Quantity over quality?
This new impetus is having an impact on the levels of engagement activity reported by asset managers. In a study by investment consultants Redington, one asset manager reported they had undertaken more than 10,000 engagement actions with the 2,000 companies they own. The report concludes ‘not all engagement is created equal [and therefore], we can’t rely on the raw numbers to tell us what’s going on’.
In fact, prioritising quantity over quality seems to have been the reaction of much of the market. In 2023, asset managers’ stewardship efforts came under fire on multiple fronts including misalignment with client values; lack of consistency in voting activities; low-quality efforts and under-resourcing; and ineffective escalation.
Elsewhere in 2023, to combat greenwashing, some managers tried to show proof of additionality or “engagement alpha”, for example through joint statements between investors and even the companies themselves.
This is probably not the answer (or the best use of time), but it does underline the lack of consensus on what ‘good’ investor stewardship is and how asset managers should manage, assess and report their activities.
Minding the gap
The good news is these issues represent ‘growing pains’. While there’s discomfort now, there lies an opportunity for the industry to learn from the pain points to build a collective understanding of what constitutes ‘good stewardship’ and strengthen practices.
We would suggest 3 key focuses:
- Focusing on outcomes (not just activity)
Ultimately, company engagement activity should be focused on encouraging companies to address issues that will help them be successful. Asset managers need to demonstrate how their stewardship and engagement activity contributes to this long-term value creation.
Outcomes are ultimately what matters. Reporting should therefore focus on achieving good outcomes, not just engagement activity. At the same time, investors claiming responsibility for outcomes is deeply problematic. Changes in company policy and performance are – and should – almost always result from multiple efforts by a variety of stakeholders.
Nonetheless, it is possible to show correlations. This begins with a systematic approach to engagement (Figure 1), comprising:
- Identifying the issues on which to engage whether proactively or reactively (the ‘inputs’);
- Prioritising material issues and setting long-term objectives and relevant engagement milestones;
- ‘Engaging and voting’ (iteratively) to achieve progress against these milestones and feeding this back into investment analysis which,
- along with our reporting of progress to clients and other stakeholders, represents our “Investor Contribution” to positive impact.
Figure 1. A systematic approach to managing company engagement
- Effective engagement
Developing a more rigorous approach to assessing the effectiveness of engagement is vital. This involves setting specific outcome milestones for each engagement. These milestones start with the company acknowledging the issue and conclude with clear evidence the issue is being effectively addressed. (Figure 2).
Figure 2: WHEB’s outcome milestones
- Making disclosures meaningful
Providing comprehensive reporting of engagement and voting activity serves as a form of assurance for investors. But this alone is not always helpful as navigating large volumes of data can be a challenge.
To avoid running the risk of either over simplifying or over complicating (with meaningless data) reporting, firms should develop complementary disclosures to evidence how actions align with client priorities and values. Figure 4 below, for example, shows how the biggest emitters of greenhouse gases (GHGs) in WHEB’s portfolios have changed their emissions between 2022 (dots) and 2023 (triangles), and also whether their approach to managing their emissions has become more or less aligned with the Paris Agreement.
Figure 4: WHEB’s investor contribution to progressing core sustainability issues
Conclusions
The ambition should be to give clients the tools to see how their investments are helping to deliver positive change through engagement work. As 2024 continues, the ability of investment managers to successfully deliver on stewardship will depend on considered, systematic stewardship processes, underpinned by robust systems, resources, and meaningful reporting.
