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From Excel to AI

The market for engagement and stewardship systems is experiencing vertical take-off.

It is a rare experience to see a business sector go from nothing to something approaching boom conditions in under five years, yet such is the recent story of engagement and stewardship software. As asset owners and asset managers increase the number and frequency of their interactions with portfolio companies, largely driven by ESG issues, many have sought a helping hand from the latest technology to stay on top of these engagements and, equally importantly, the topics driving them.

“Historically, investors have used Excel to track and manage their stewardship interactions and engagement dialogues,” says Rickard Nilsson, Head of Stewardship Success at Esgaia, a supplier of engagement management software.

“However, the larger the organisation the more people are involved in the process, leading to more interactions and data complexity. You reach a point in your data management journey where Excel simply doesn’t cut it anymore.”

Global asset manager Aviva Investors voted on 73,438 resolutions at 6,732 shareholder meetings last year, with each vote informed by varying levels of due diligence and engagement activity. On climate specifically, the firm sanctioned 18 investee corporates for failing to meet clearly-set measures of climate ambition, as part of its Climate Engagement Escalation Programme. Conducting such targeted engagement initiatives across a widening array of ESG risks and impacts, then incorporating the findings into voting decisions, is a complex, growing and integral element of institutional investment.

The mushroom-like growth of engagement and stewardship systems is helping to answer this problem. But in doing so, it is throwing up a series of new questions. Are asset owners and managers best advised to build their systems in-house or to buy them in? Are they spending enough or cutting corners? Does artificial intelligence (AI) have a role to play?, Could they start passing their own judgments on what is and is not a sustainable investment? Opinions vary. Are there still shortfalls in the capabilities of even the leading systems? One large institution says yes.

On the question of sourcing, Nilsson says there is a number of options. “Aside from many still using Excel, some lean on their portfolio and research management systems; others use traditional client relationship management systems; there are those who build and expand on something in-house, and those who now opt for purpose-built systems.”

Off the shelf

Paul Lee, Head of Stewardship and Sustainable Investment Strategy at investment consultant Redington, describes himself as agnostic; what matters is to obtain a system that enabled effective reporting. “The software platforms should enable people to push a button and get the information the client needs. Then that reporting challenge goes away.”

At ESG Investor’s recent Stewardship Summit, Lee raised the question of the resources, or lack of them, that asset owners are able to make available for stewardship. “The bulk of asset owners don’t have much – or any – resource to think about stewardship activities,” he noted.

To serve such clients, asset managers need to invest, Lee asserts. “We have said for some time that managers need to upgrade their systems. These systems do not appear to be that expensive.”

Nilsson is far from agnostic on the question of sourcing, pointing out that Esgaia, founded in 2020, supplies more than 35 asset managers and asset owners round the world. “It helps investors better structure their stewardship and engagement data management, mainly by structuring data recording, performance monitoring, co-ordination, and reporting.”

As well as purpose-built functionality for these key tasks, ‘off-the-shelf’ platforms offer quick implementation and “relatively cheap” subscription-based fee models, he added.

Mais Callan, Founder of Impactive Tech, which  offers an ‘all-in-one’ ESG integration and engagement management tool, says: “Relying on spreadsheets or basic home-built systems to record and track engagement progress is no longer sufficient and doesn’t scale to the growing regulation.

“As stewardship expectations from regulators, asset owners and other stakeholders become more sophisticated, it is only natural that the tools and processes evolve.”

AI’s “problem with the truth”

No account of this market would be complete without a reference to the tech story of the moment, AI. Where does it fit in to this evolving landscape?

Bang in the middle, according to Samantha Duncan, CEO of Net Purpose, which helps investors launch, grow and report on sustainable and impact funds, and uses AI-assisted process to extract information from sustainability filings.

“But AI accuracy is not 100%, so humans check every single fact. AI is fine on straightforward matters such as the profit and loss account, but less so on items such as a sustainability report.”

She added: “AI is only as good as the data that trained it.”

Callan at Impactive Tech broadly agrees. “AI can bring real benefits to this sector if used appropriately. It could be used to help alleviate some of the more administrative aspects of organising stewardship and reporting activities, freeing-up highly skilled professionals to focus on carrying out high-quality engagements with companies and policymakers.”

At Redington, Lee sees a limited, supporting part at best. “What is engagement? At its core, it is the interaction between two people concerning something that has to change.

“I don’t see how you can insert AI into that process. Also, it has been proved that AI systems can have a problem when it comes to the truth.”

Nevertheless, appetite for efficiency and automation is growing. Last year, UK pension fund Railpen explored whether it could replace a patchwork of databases monitoring stewardship and producing reports with “a single available solution”, explains Caroline Escott, Senior Investment Manager.

Maturing market

Railpen drew up a set of criteria for the system they sought, including the ability to bring together data including engagement tracking, stock research and voting information, and the categorisation of engagement by activity and theme.

Escott says: “We were pleased with how the market for stewardship database and systems providers has developed in recent years. However, we were unable to find a current provider that would meet all our essential criteria, though we did find some that could meet a selection of these.”

Railpen intends to look at the market again later this year, while exploring the alternative of an in-house solution.

Lee notes that requirements for engagement and stewardship systems varied widely. “The question of Chinese walls is hugely important in some cases, with strict demarcation among different portfolio management teams, while other managers may want everyone to be able to see everything.”

Less negotiable is the need for such systems to be protected from hackers and other forms of outside interference. Nilsson says: “There are no regulatory hurdles worldwide. But we do have to have very rigid IT security in place, as that’s where investors have concerns.”

Another worry is the number of asset managers and owners whose tracking systems include different elements that do not communicate or are generally isolated from one another. It’s not unheard of for the system used to track voting at annual general meetings to be quite separate from the engagement management system.

Stuck on data

Lee at Redington agrees that this can be a concern, given the potential for information to fall between the gap. Duncan at Net Purpose comments: “I am starting to hear this a little more.”

Callan raises a different issue. “For true ESG integration to succeed, the fund managers, not just the stewardship teams, need to carry out and record engagements with companies. However, we see examples of inertia — some fund managers are reluctant to change the way they work or the systems they use, so there is the challenge of closing that gap.”

Is there a danger of outsourcing value judgments to computers? Lee thinks not. “The software we are talking about is not particularly complex. Essentially, it measures activity, how that activity relates to your objectives and what the next steps should be, which is inputted by the individual concerned.

“The system can produce the engagement stories, but it is not complicated.”

Regulatory and other market drivers may soon add bells and whistles, as the scrutiny and significance attracted by stewardship increases. Asset owners and regulators are demanding better evidence and outcomes from managers. “Expectations have grown considerably of investors’ stewardship efforts and how they exert influence over assets. Just as responsible investing as a whole hasn’t escaped claims of greenwashing, nor has the strategy of active ownership and ESG engagement,” says Nilsson.

“Today, investors need to clearly articulate and report on their strategy, activities and outcomes, and how they are being resourced.”

Duncan adds: “A lot of the change is being led by active fund managers. Engagement and stewardship are so important to sustainable and ESG investing.

“The more we can enable engagement and stewardship teams to use the same information on the same topics, the better.”

Ultimately, the growth of engagement management software reflects the scale of the ESG investment scene. “Interest arises from the fact that US$120 trillion is committed globally to sustainable investing. A top agenda item for CEOs and CIOs is to establish what is and is not a sustainable investment,” notes Duncan.

“But the topic has been stuck on data for a long time. And it will continue until we get a clear idea of what ‘great’ looks like in this area.”

While anticipating much change in the future, Callan at Impactive Tech suggests that some core capabilities will continue to be necessary for systems to provide a sound foundation for engagement and stewardship activity: “It’s still about easy and consistent record capture, managed workflows to drive processes, linking together different data sources, and extracting the data or reports in different formats.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

Copyright © 2024 ESG Investor Ltd. Company No. 12893343. ESG Investor Ltd, Fox Court, 14 Grays Inn Road, London, WC1X 8HN

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