Stewardship and engagement will be at the forefront of ESG investors’ minds this year, with regulation such as the new UK Stewardship Code having taken effect, and this year’s proxy voting season drawing closer.
And onlookers would say rightly so, as shown by last year’s Boohoo scandal where a number of ethical funds were exposed as having significant allocations to the fast fashion brand, and more recently the holdings in some ‘responsibly invested’ funds of Compass Group, the owner of Chartwells, which came under fire for providing ‘unacceptable’ school meals.
See also: Boohoo scandal ‘poses challenge’ to ESG ratings
“Good engagement is the exception rather than the rule,” says Simon Rawson, director of corporate engagement at ShareAction. “What we see when we look at investor policies and practices through our asset manager rankings, or when we look at investor voting practices in our proxy voting analysis, is the vast majority of the world’s biggest asset managers are asleep at the wheel on climate change, but also across a much broader range of ESG topics that are now front and centre for most ultimate owners of capital.”
Anyone with a substantial holding should know the detail of its practices and procedures to a degree that is proportional with the size of the holding, says Rawson.
But with such a wide variety of engagement and stewardship practices touted at fund houses; stewardship advice heralding from the Asset Management Taskforce, the Pensions and Lifetime Savings Association, the Principles for Responsible Investment (PRI) and the Financial Reporting Council, to name a few; and a lack of standardisation in this area, it can be di cult to know how to know what constitutes a comprehensive approach.
Best practice
With this is mind, Portfolio Adviser sister title ESG Clarity asked Square Mile Investment and Consulting to highlight examples of their view of best practice (see below). “We look for effective co-ordination, and identified objectives and results,” says Jake Moeller, senior investment consultant at Square Mile.
“What is it the fund manager wants to achieve and why? How have they set their priorities? What does success look like? How far are they prepared to go with a board or other shareholders? When will they divest?
“Importantly, how patient will the fund manager be with the company on an issue? Many social considerations are slow burns and a fund manager has to be both patient but firm with trying to initiate change. Smaller groups should be prepared to collaborate – even small owners can share being part of a larger voice.”
Ultimately, says Moeller, evidence is key, and those groups that can verify how their engagements have been successful, how many resolutions they have proposed and why they voted in a particular way, and produce detailed stewardship reports, will come out on top.
Evidence for change
Providing evidence will be on everyone’s agenda this year, according to Hans-Christoph Hirt, head of EOS at Federated Hermes. “It’s not just about having a nice conversation, it’s about achieving change,” he says.
EOS, which advises on $1.2trn (£0.9trn) assets under advice, takes three main approaches to engagement: a milestone measurement system that sets engagement objectives and tracks progress; the publishing of around 20 case studies a year to encourage transparency; and the analysis of its data and tracking system by an independent team of academics, which also looks at the financial impact of achieving change.
“We’re also running statistics that’s private information for the investors we’re working for on engagement where things are difficult. We call them ‘blocked engagement’ and we’re thinking of providing the investors short case studies explaining what we were doing and what the problem was,”
Hirt adds. “I think this will become a common standard and in due course, saying publicly we haven’t had enough traction here with this engagement. That would typically be after trying everything including working together, using shareholder meetings, open letters and after escalation of engagement.”
Looking ahead
Most ESG investors know a few chats with company management won’t cut the mustard and are enacting robust stewardship policies. Collaboration and shareholder resolutions are going to be key to improving stewardship this year and beyond.
“We’ve certainly seen a degree in the evolution of progress of investors working together and greater amounts of collaboration, such as signing the Climate Action 100+,” says Paul Chandler, director of stewardship at the UN PRI. “Linked to that, there’s more assertiveness in using stewardship tools, such as investment managers using their vote as a way of communicating to company management how they think companies should be acting, rather than seeing voting against companies as a bad thing or an admonishment of management overall.”
Chandler says he has seen more comfort from investors to vote in favour of shareholder resolutions, particularly on climate topics but increasingly also on social issues.
“There’s further pressure on the investment community, and on the corporates they’re investing in, to advance practice and work to safeguard human rights across the entire value chain, even on the direct employees of portfolio companies.”
He also adds the industry may start to see more advanced tools being used, such as litigation, which was used by Swedish pension fund AP7 and ClientEarth as a shareholder of Polish utility Enea.
As the spotlight brightens on stewardship and engagement this year, tracking engagement aims, collaborating with other investors and robust reporting will be essential to ensuring best practice and furthering ESG causes.
Case studies: Square Mile highlights best practice
EDENTREE
The approach: The EdenTree responsible investment (RI) team, which works closely with the fund managers, has the ability to veto a stock if a company does not stand up to scrutiny. Alongside company research, the RI team’s members are responsible for voting and engagement with companies.
If the team identifies potential issues in the initial screens, it will work with those companies to improve, and, once invested, its members will maintain an ongoing dialogue with companies, working with them through any controversies or unexpected events that may occur, and ensuring they maintain high standards.
The RI team also places a great deal of emphasis on what it refers to as ‘thematic engagement’ to identify issues. It then works across a sector and often in collaboration with other groups to ameliorate or eliminate an issue. The results of these engagements are published on an annual basis in the group’s Responsible Investment activity report.
The RI team also drives EdenTree’s thought leadership, which involves producing detailed overviews of sectors, value chains and individual issues that may arise, such as the group’s thoughts on palm oil or sugar.
Example: The team engaged with 10 construction companies on modern slavery. They pressed the companies on due diligence within supply chains and have supported the Liechtenstein Initiative’s Blueprint for Mobilising Finance against Slavery and Trafficking, which calls for an investor statement and engagement group that will initially target 16 companies in the UK hospitality sector, a group that will seek to drive public policy change focused on strengthening the Modern Slavery Act, and one that will bring together academics, ESG ratings providers and investors to develop metrics on Modern Slavery that can be incorporated into ESG ratings.
BAILLIE GIFFORD
The approach: The managers deem ongoing engagement with companies as critical to assess and report on how a company has delivered on its financial and impact objectives. They undertake a proprietary ‘positive chain’ assessment for each stock, with the purpose of assigning clear outcomes and milestones for ongoing monitoring purposes.
A good level of detail on this can be found in the fund’s annual impact report. This approach is termed ‘inclusions-based’, for the fund does not use any formal exclusions screening. As an output of the process, Baillie Gifford aggregates the product impact for each company and links it to the United Nation’s Sustainable Development Goals.
Example: Baillie Gifford engaged with energy efficient insulation manufacturer Kingspan twice in 2019 on innovation and measuring environmental impact, highlighting it would like to see the company increase the work undertaken on product lifecycle analysis, which would assess the overall environmental impact of a product. As a result the company is moving from its decentralised approach to innovation to one that is more centralised.
FEDERATED HERMES
The approach: Federated Hermes has established an enviable track record of bringing about successful corporate change. Its co-ordinated approach through the EOS initiative is well documented and providing evidence is key to its process. It is also vocal and has published several impressive case studies that show how successful stewardship not only results in social improvements but in stronger financial performance.
Example: Over the past year, EOS at Federated Hermes, along with seven other Climate Action 100+ signatories, engaged with Rolls-Royce to encourage it to set new interim targets in line with a path to net zero, gain reassurance of its climate analysis, advance its climate-related financial disclosure, and consider tying executive compensation to climate performance metrics.
This article first appeared in the January issue of Portfolio Adviser‘s sister title ESG Clarity. Read more here.
