Rickard Nilsson, Director, Strategy and Growth at Esgaia, argues that investment stewardship must focus on quality, not quantity, to effectively drive climate action.
Investment stewardship is quickly becoming one of the most popular responsible investing strategies globally. With a compelling narrative for influencing companies using shareholder rights and voice, investors big and small are claiming asset stewardship as central to their strategies.
At the same time, because of the difference in approaches and processes, there is little standardisation and no agreed definition of what good resourcing looks like, which has been heavily exploited. This has not gone unnoticed with warnings of widespread greenwashing now acting as a backdrop for increased scrutiny of investor practices.
Present and future
At a high level, investors’ engagement strategies can be divided into two buckets: one in which the investment team is in charge (with operational support), and one where the mandate is split between the investment team and an ESG/stewardship team. In the former, the portfolio managers and analysts are seen as ultimately responsible for both investee monitoring and asset stewardship, while in the latter, it is recognised that dedicated ESG engagement does require specialist resources and expertise.
Purposeful engagement should be about leveraging your position and insights to set expectations, work towards specific goals and objectives, and use escalation and collaboration as necessary. It is as such vastly different from investee monitoring focused on fact-finding and disclosure requests, or is it? Perhaps it all falls across an intensity spectrum, imposing the difficult task on investors to tier these interactions based on the level of effort to stay compliant with emerging disclosure regimes.
What’s problematic is that only a few investors do so, begging the question: how come? Is it because we are at an early stage of adoption? Or because of the challenges and complexities of doing so? Or because investors are unwilling to show the reality? I suspect it’s a combination – we are seeing solid adoption of such tiering, but also concerns that it’s making reporting even more onerous, especially as many view their investee monitoring and asset stewardship as one.
Words of caution
I am worried that prevailing trends in modern asset management are many ways is on a collision course with asset stewardship as currently practiced. Still rooted in narrow single-company performance and engagements, as I’ve written about before, it’s difficult to marry stewardship objectives with the increasingly short holding periods and portfolio turnovers, and the often cross-generational time horizons of asset owners.
There is also a risk that in a race to keep the competitive edge, investment stewardship has become much of a numbers game, losing sight of the actual purpose. We should recognise that having strategic, impactful discussions with investees around employment, productive investment, and value-added output is no easy task. It’s certainly not a frame in which junior ESG analysts will be able to change much, aside from some disclosure improvements.
In short, we’re running out of time and need effective climate action now. Similarly to the status of corporate sustainability reporting – we’ve seen a meteoric rise in such, while emissions, environmental damage, biodiversity loss, etc., keep on rising – it would be foolish to take for granted many of the impact narratives in stewardship reports these days.
I am worried that we are outsizing the role and influence of investors on society, and how it’s shaping industry practice. Similar to some of the broader industry criticism, stewardship, as currently practiced, is often too focused on individual companies, instead of focusing on maximising the overall value of the economy and diversified portfolios through system-level stewardship and public policy engagement.
The devil is in the detail
I still believe investment stewardship is one of the best options investors have to exert influence over investees and their activities. However, the route to impact is not mechanistic, so when you hear about all those great claims, what you really need to do is look under the hood.
In my view, one of the most important areas to wrap your head around is the coordination between those responsible for stewardship and the investment department, and whether there is a solid feedback loop to investment decision-making. For example:
- What does the governance structure look like? Who’s in charge of implementation and who’s driving the dialogues?
- Is active ownership data readily accessible to both ESG and investment teams?
- Are there mechanisms in place to rebalance portfolio holdings based on outcomes of engagements and voting?
- How does internal knowledge sharing work, i.e. are there regular training, cross-team meetings, and presentations?
Where do we go next?
When it comes down to it, investment stewardship should be about quality, not quantity. If we do want to assign investors a bigger role and expect different results, then we must do things differently. Recognising investors have different resources, strategy and culture still matter, and will lead to different outcomes. Investors therefore need to focus on rightsizing resources to their ambition level, including in terms of people, processes, and systems.
Rickard Nilsson, Director, Strategy and Growth at Esgaia, argues that investment stewardship must focus on quality, not quantity, to effectively drive climate action.
Investment stewardship is quickly becoming one of the most popular responsible investing strategies globally. With a compelling narrative for influencing companies using shareholder rights and voice, investors big and small are claiming asset stewardship as central to their strategies.
At the same time, because of the difference in approaches and processes, there is little standardisation and no agreed definition of what good resourcing looks like, which has been heavily exploited. This has not gone unnoticed with warnings of widespread greenwashing now acting as a backdrop for increased scrutiny of investor practices.
Present and future
At a high level, investors’ engagement strategies can be divided into two buckets: one in which the investment team is in charge (with operational support), and one where the mandate is split between the investment team and an ESG/stewardship team. In the former, the portfolio managers and analysts are seen as ultimately responsible for both investee monitoring and asset stewardship, while in the latter, it is recognised that dedicated ESG engagement does require specialist resources and expertise.
Purposeful engagement should be about leveraging your position and insights to set expectations, work towards specific goals and objectives, and use escalation and collaboration as necessary. It is as such vastly different from investee monitoring focused on fact-finding and disclosure requests, or is it? Perhaps it all falls across an intensity spectrum, imposing the difficult task on investors to tier these interactions based on the level of effort to stay compliant with emerging disclosure regimes.
What’s problematic is that only a few investors do so, begging the question: how come? Is it because we are at an early stage of adoption? Or because of the challenges and complexities of doing so? Or because investors are unwilling to show the reality? I suspect it’s a combination – we are seeing solid adoption of such tiering, but also concerns that it’s making reporting even more onerous, especially as many view their investee monitoring and asset stewardship as one.
Words of caution
I am worried that prevailing trends in modern asset management are many ways is on a collision course with asset stewardship as currently practiced. Still rooted in narrow single-company performance and engagements, as I’ve written about before, it’s difficult to marry stewardship objectives with the increasingly short holding periods and portfolio turnovers, and the often cross-generational time horizons of asset owners.
There is also a risk that in a race to keep the competitive edge, investment stewardship has become much of a numbers game, losing sight of the actual purpose. We should recognise that having strategic, impactful discussions with investees around employment, productive investment, and value-added output is no easy task. It’s certainly not a frame in which junior ESG analysts will be able to change much, aside from some disclosure improvements.
In short, we’re running out of time and need effective climate action now. Similarly to the status of corporate sustainability reporting – we’ve seen a meteoric rise in such, while emissions, environmental damage, biodiversity loss, etc., keep on rising – it would be foolish to take for granted many of the impact narratives in stewardship reports these days.
I am worried that we are outsizing the role and influence of investors on society, and how it’s shaping industry practice. Similar to some of the broader industry criticism, stewardship, as currently practiced, is often too focused on individual companies, instead of focusing on maximising the overall value of the economy and diversified portfolios through system-level stewardship and public policy engagement.
The devil is in the detail
I still believe investment stewardship is one of the best options investors have to exert influence over investees and their activities. However, the route to impact is not mechanistic, so when you hear about all those great claims, what you really need to do is look under the hood.
In my view, one of the most important areas to wrap your head around is the coordination between those responsible for stewardship and the investment department, and whether there is a solid feedback loop to investment decision-making. For example:
Where do we go next?
When it comes down to it, investment stewardship should be about quality, not quantity. If we do want to assign investors a bigger role and expect different results, then we must do things differently. Recognising investors have different resources, strategy and culture still matter, and will lead to different outcomes. Investors therefore need to focus on rightsizing resources to their ambition level, including in terms of people, processes, and systems.
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