Project aims to tackle “pervasive” under-resourcing, but asset owners must show they value stewardship via manager selection.
The upcoming AGM season will see asset owners and managers pushing for change at investee firms, with many observers counting votes and shareholder resolutions as a measure of investors’ commitment to both sustainability and the principles of good stewardship.
But a qualitative approach to monitoring stewardship activity – based on meetings held and votes cast – can be misleading, according to Emmet McNamee, Head of Stewardship, Active Ownership 2.0, at the UN-convened Principles for Responsible Investment (PRI), which has recently launched a project to investigate stewardship resourcing levels and improve outcomes.
“Our approach with this project is not ‘quantity over quality’ but precisely better resourcing to go beyond short term, box-ticking stewardship because outcomes delivery is a function of both quality and quantity of stewardship,” he said.
“Better resourcing is not guaranteed to deliver better outcomes, but its absence is guaranteed to doom it,” added McNamee.
The project stems partly from the widely held perception that stewardship is currently under-valued and under-resourced, a situation which potentially undermines its effectiveness in achieving effective oversight of assets.
“The lack of stewardship resources is widely acknowledged but rarely ever challenged,” observed McNamee. “Stewardship culture and practices vary greatly between investor types, asset classes or geographies, but the lack of resources is pervasive – if not universal.”
In partnership with the Thinking Ahead Institute (TAI), the PRI is researching the level of resources institutional investors should dedicate to stewardship, partly by conducting a benchmarking study to help organisations to better understanding current stewardship practices, resourcing requirements and other costs. The PRI is also establishing a technical working group to act as a “sounding board” on issues including stewardship practices, capacity constraints and resourcing models.
A report is scheduled to be published ahead of the PRI in Person 2023 event in October. The PRI and TAI expect to propose a calculation methodology to estimate “appropriate” levels of resources to both direct and market stewardship activities to have a real-world impact. This should help different types of investment organisations to match stewardship expenditure to their particular level of ambition, said McNamee.
Numbers “don’t add up”
Paul Lee, Head of Stewardship and Sustainable Investment Strategy at UK-based investment consultants Redington, said asset owners are taking stewardship “more seriously” but are not yet clearly articulating its role in the selection and appraisal of asset managers.
“Pretty much no fund manager is giving sufficient resourcing to stewardship,” he said. “They’re invested in typically thousands of companies but at most they have a few dozen individuals responsible for stewardship. The numbers just don’t add up.”
Research suggests the growing emphasis on stewardship and engagement is only slowly feeding through to better resourcing or reporting.
A 2019 study of the stewardship activities of the big three index fund managers – BlackRock, Vanguard and State Street – found that there was no engagement with 90% of investee companies over three years, with a further 5% of firms experiencing a single engagement.
A recent Redington study of 36 reports by asset managers under the UK Stewardship Code found shortcomings in both the reported quality and quantity of stewardship-related activities.
The analysis revealed wide disparities in the activities considered as counting toward stewardship, as well as significant differences in focus across regions, sectors and themes. From a qualitative perspective, case studies presented by managers often failed to draw clear links from stewardship activities to positive outcomes, with just 42% highlighting “substantive and proactive” engagements.
“Good stewardship has to be a process that operates over time, but a lot of managers don’t appear to have the systems needed to assess their progress over time and hold themselves to account for the delivery over months and years,” said Lee.
An independent report commissioned by the Financial Reporting Council last year found that the impact of its updated UK Stewardship Code had been “very positive” in improving the governance and resourcing of stewardship by UK-based asset managers and owners. But it also identified wide differences in practices and budgets deployed.
McNamee said the code had been “strong on substance” but noted that it built on a supportive existing UK regulatory framework, including investment regulations, the Shareholder Rights Directive, and the Green Finance Strategy.
Lee suggested the FRC could reintroduce a tiering system for asset managers operating under the code to further incentivise best practice in stewardship.
A decisive factor
Academic research has highlighted the difficulties in measuring the effectiveness of stewardship and attributing outcomes. These have made it hard for either asset managers or owners to put a price on stewardship activities. Despite being seen as increasingly important to fulfilling the responsibilities of ownership, especially in terms of reducing ESG risks, it is not expected that stewardship-related services will be explicitly priced in the short to medium term.
McNamee said there are other steps investors could take to increase the profile and resourcing of stewardship sources. “For stewardship to be adequately resourced and successful, you need asset owners who recognise its importance, are willing to pay for it and incorporate it as a decisive factor in their selection, appointment and monitoring processes,” he said, noting that this area is the subject of a separate PRI project.
McNamee said he expected a range of outcomes and responses following the stewardship resourcing project. “In certain cases, more resources might mean improved manager selection, appointment and monitoring practices, increased capacity to escalate or the adoption of policy engagement practices,” he said. “In others, extra capacity might make the difference between little to no direct stewardship and an efficient programme targeting high priority companies.”