Credible, scalable active ownership programmes require forward-looking technology investments, says Rickard Nilsson, Director of Strategy and Growth at Esgaia.
Let’s be honest, Excel for engagement management isn’t really cutting it anymore, is it? Smart investors now use purpose-built software to help optimise the engagement process and demonstrate their stewardship.
With the increasing focus on digital infrastructure and software capabilities in asset management, modern technology has helped a new breed of actors to emerge, several focused on addressing the challenges of inefficient engagement management. This article aims to provide investors with insights and perspectives to help guide their evaluation of engagement process efficiency and supporting system architecture.
It’s about the journey, not the destination
In a recent blog post examining the market development for ESG data and infrastructure, we cited a study valuing the ESG data market at less than US$1 billion, which starkly contrasts the US$35 billion spent on financial data. Given the immense sustainability challenges we face and the resulting quest toward a sustainable transformation of the global economy, this should warrant some self-examination amongst investors in terms of their related spending. With sustainability disclosures now migrating to the accounting and finance functions, we should expect more jointed-up approaches to these oftentimes separated budgets going forward.
Per findings in BNP Paribas’ Global ESG Survey (based on the views of 356 institutional investors representing more than €11 trillion AUM), ESG reporting/disclosure at all levels (company, portfolio and fund) and ESG data aggregation/analysis were listed as top technology investment priorities for investors. As this becomes increasingly challenging for investors to manage, reliance on service providers is going to continue. As such, we believe building out ESG capacity and competence is as much a question of human capital and expertise as of investing in technology for data management and process optimisation.
Looking backwards and forwards
While ESG data offers a primarily backward-looking perspective, engagement is on the other hand forward-looking in nature. It’s about the direction of travel, understanding and setting expectations for company strategies, actions, and plans to address sustainability risks and impacts. With active ownership as a primary mechanism of impact, adherence to the strategy is bound to continue its climb over the years to come.
Now, active ownership has not been spared in the greenwashing debate, and we know that it needs to become more effective in order to not become illusory. Both investor-specific challenges and broader market barriers to engagement success need to be addressed. Issues raised via the UN Principles for Responsible Investment – in its Active Ownership 2.0 framework or its guidance considering enablers and barriers to engagement success – include the time-consuming and resource-intense nature of active ownership, unstructured processes and data management, and limited influence and legitimacy to really shape corporate behaviours.
Evaluating system capabilities
When it comes to engagement management, most investors use Excel, or other non-purpose-built tools. In so doing, many will have experienced some of the inefficiencies around data management, coordination and oversight, and stewardship reporting – as further detailed in this article. In order to avoid suboptimal use of resources and establish smooth workflows that enable a focus on higher-value activities and purposeful dialogue, investors should evaluate options that help address such challenges.
Best-of-breed solutions should at a minimum fulfil the primary use cases of activity recording, progress monitoring, and stakeholder reporting. Further, it should help connect oftentimes siloed data and information, while fitting into existing workflows using APIs and SFTPs for internal or third-party integrations. For example, automating holdings transfers, ESG and voting data, and meeting notes from risk or portfolio management systems, are highly relevant to support engagement prioritisation and process across teams. In that way, investors can operationalise the workflow to ensure efficiency, accuracy, and complete data trails across entity, product and engagement level.
Due diligence process
When your organisation decides to evaluate system capabilities, ensure that you go for something future-proof, which can account for evolving practices and expectations of your stewardship work over time.
In terms of external SaaS providers, general benefits include proof-of-concept, reduced time to benefit, and cost-sharing for longer-term innovation and improvements. In other words, these providers commit to developing functionality based on client insights and market best practices, which enables buyers to realise time- and cost savings by accessing an ‘off-the-shelf’ solution, while minimising the need for upfront IT development and maintenance. The downside is of course that in-house development would give you more control, so you need to really assess to what degree the functionality and flexibility meet your expectations, now and in the future.
Engagement tracker cheat sheet
To help you establish requirements aligned with organisational needs, you can access a generic engagement management checklist below. Based on investor insights, this checklist covers primary functionality needs such as:
- Recording & monitoring, including dialogue information and oversight, both on engagement and activity level
- Stakeholder reporting across entity, product and engagement level
- Data & operational requirements covering e.g. information access, user experience, and innovation commitments
You can access the file here.
Remember that expanding your ESG capabilities is about the journey, not the destination. I hope this article can help frame your organisation’s thinking around current engagement capabilities and future needs.