Industry

Many Partners, Many Tactics Needed for Success of Active Ownership 2.0

Asset owners discuss monitoring methodologies, flexible responses and “nuclear options” at PRI’s EMEA Digital Forum.

Institutional investors are making a tangible difference to environmental and social outcomes through collaborative and proactive engagement, according to speakers on the ‘Active Ownership 2.0’ panel session at the Principles for Responsible Investment’s two-day EMEA Digital Forum.

In one of a series of case studies, Ellen Kunst, Advisor on Responsible Investment and Governance at Dutch pension fund administrator and asset manager MN, highlighted a Netherlands-based collective initiative focused on payment of living wages.

Formed in 2018, the Platform Living Wage Financials (PLWF) is an alliance of 15 institutional investors, with a combined €2.6 trillion in assets under management, focused on monitoring and encouraging investee companies to ensure payment of living wage to workers across supply chains.

“Living wages and incomes can lift workers out of poverty and promote decent standard of living, while also mitigating the risk of excessive overtime and child labour and reducing inequalities,” said Kunst.

Platform members have engaged collectively and individually with 50 companies from three target sectors – garments and footwear, food and agriculture, and retail. The investors’ approach has included coordinated engagement, regular assessments and detailed reporting, the development of best practice guidelines and the participation of a range of external stakeholders, including unions and non-governmental organisations.

Conducting deep research was key to laying a good foundation for engagement talks with companies, said Kunst. “We developed a UN Guiding Principles-aligned method to monitor company progress towards enabling living wages and incomes, through consultation with external partners and an accounting firm to ensure validity and robustness of efforts,” she said.

John Howchin, Secretary-General of the Council on Ethics, discussed the Swedish National Pension Funds’ work with the Church of England Pensions Board on the Investor Mining Tailings Safety Initiative, launched after an incident in 2019 that claimed the lives of 270 people in Brumadinho, Brazil. In particular, Howchin explained how the response of asset owners needed to evolve in step with a deepening knowledge of the underlying issues.

“Our understanding was that this topic was not resolved, and we needed to attend to the issue much more extensively than what we could see from the beginning,” he said. “To address the problem, you need perspective – an understanding of who you are engaging with and what premises you are engaging with.”

A key insight was that several regulatory structures were no longer fit for purpose. Many rules were part of local, regional, or national regulatory systems, but it became clear that global standards were required, which is where the pension funds and their partners focused their efforts. Howchin also emphasised the importance of transparency, which was achieved in part by the development of a publicly available global database of tailing dams.

Peter Barnett, senior lawyer at ClientEarth, explained how the environmental charity uses legal tools to protect people and the planet. “Our objective is for business and investment decisions to be aligned with the goals of the Paris Agreement. This means real world emission cuts and crucially, active ownership by asset owners and managers,” said Barnett.

Among its projects, ClientEarth coordinated a challenge to a Polish coal-fired project on the grounds that it posed unjustified financial risks to the companies and shareholders involved. They wrote to the board of directors of each company, inviting them to withdraw. Major shareholders such as Legal & General Investment Management stated publicly that the project did not make financial sense and coordinated a joint investor letter, expressing their concern.

“This is a good example of stewardship using the full set of tools at shareholders’ disposal,” Barnett explained. “Active ownership is an essential element of discharging fiduciary duties for the best long-term interests of beneficiaries.”

Although there are many ways for shareholder concerns to be expressed, Barnett said litigation has a role among the escalation strategies which institutional investors may adopt in the exercise of stewardship. “While it is not a tool of first resort, in particularly egregious cases, it is also not a completely nuclear option,” he said.

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