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Stewardship Nears Breaking Point

Stretched resources risk undermining sustainability priorities, but collaborative engagements, industry initiatives and regulatory change offer support to asset owners.  

When it comes to stewardship, “every process, every commitment and every initiative is based on the assumption that asset owners will have adequate resources in place”, according to Emmet McNamee, Head of Stewardship at the UN-convened Principles for Responsible Investment (PRI). 

Activity levels suggest these resources are working hard. At a glance, the rising number of ESG-related shareholder proposals filed and backed by investors shows a growing appetite amongst asset owners to push systemic stewardship further and secure positive environmental and social outcomes.  

In the US alone, 529 shareholder resolutions on environmental, social and related sustainable governance themes were filed during the 2022 proxy season, a 20% increase on the previous year, according to the Proxy Preview.  

Oil and gas major Shell is under increasing pressure ahead of its annual general meeting (AGM) on 23 May, with asset owners like PGGM and the Church of England Pensions Board announcing their support for a shareholder proposal calling for the company to align its Scope 3 emissions target with the Paris Agreement.  

Car manufacturer Toyota is facing a climate-focused shareholder resolution of its own, with Danish pension fund AkademikerPension demanding more transparency on the company’s climate lobbying practices.  

However, as institutional investors, academics, NGOs, investor networks and data providers congregated in London last week for ESG Investor’s inaugural Stewardship Summit, it became clear that many asset owners lack the resources necessary to fulfil their engagement ambitions.  

Paul Lee, Head of Stewardship and Sustainable Investment Strategy at investment consultancy Redington, said stewardship resourcing is a major barrier to the level of engagement necessary to fulfil sustainability targets. 

“But one of the biggest dangers to this discussion [on stewardship] is that the asset owners most active in the conversation are the ones with the resources,” he said, speaking alongside McNamee during the opening panel at the summit, ‘Partners in Stewardship’.  

“The bulk of asset owners don’t have much – or any – resource to think about stewardship activities. 

“We need to remember them in these conversations […] and we need to make sure that we’re talking about the quality rather than the quantity of these activities,” Lee added.  

Quality and effectiveness of stewardship is also on the agenda of UK regulators. A recent Financial Conduct Authority (FCA) discussion paper asked for feedback on possible regulatory change needed to support collaborative engagement and systemic stewardship, while the Financial Reporting Council is due to lead a review of its Stewardship Code.  

Also speaking at the Stewardship Summit, Mark Manning, Strategic Policy Advisor on Sustainable Finance at the FCA, emphasised the importance of considering “how all the regulators can work together to ensure coherence” and “the importance of stewardship within institutions and the oversight it receives from senior management”.  

Resource imbalance  

Due to a lack of resources, many asset owners “have to be reliant on the activities of their fund managers – whether those are good enough or not”, said Lee.  

This can cause tensions when there is a gap between the stewardship priorities of the asset owner and the engagement and voting behaviours of the asset manager.  

Despite asset managers making progress on developing new environmental and social-focused engagement policies over the past few years, these commitments were “not being matched by real-world action” in 2022, according to survey of 77 of the world’s largest asset managers conducted by UK NGO ShareAction. 

Transparency is improving, but slowly. While 88% of asset managers disclosed their votes publicly (up from 55% in 2020), 42% failed to publish their rationale for votes against shareholder resolutions, the report said. Less than a third of asset managers provided a full list of firms engaged with. 

“One of the main reasons asset owners care about the voting behaviours of their managers is because it’s a very clear signal of where a manager really stands on an issue,” said PRI’s McNamee. 

“If they are misaligned with an asset owner on voting, then they are probably misaligned across everything else when it comes to stewardship.” 

Redington recently examined 36 reports filed by asset managers under the UK Stewardship Code, identifying shortcomings in the quality and quantity of stewardship-related activities, with only 42% of reports highlighting “substantive and proactive” engagements.  

Some asset owners are leveraging third-party support to improve coordination and control of stewardship. Jacqueline Jackson, Head of Responsible Investment at London CIV, has overseen the UK local government pension scheme’s efforts to set its own systemic stewardship priorities and employment of stewardship provider EOS at Federated Hermes to lead the firm’s engagement activities. 

“The main challenge now is interpreting the data EOS at Federated Hermes provides, looking at our own portfolios regularly to understand where our unique exposures lie, and then using that information to lead conversations with EOS and other external managers,” Jackson said.  

Despite asset owners sitting at the top of the value chain, the majority do not have the capabilities needed for such a hands-on approach, and the reality is that the bulk of the resource to carry out effective engagement sits with the asset manager. 

“Asset owners need to get asset managers to do their job better rather than taking the responsibility off their hands,” said Lee from Redington.  

Although Lee noted the resources and skills needed for asset owners to wield voting power directly across the firms in their portfolios, innovative approaches are making it technically easier to do so.  

Technology provider firm Broadridge Financial Solutions recently published a white paper on investors’ growing interest in pass-through voting, noting how it is fostering “the democratisation of investing in a major way”, giving investors a voice in how their asset managers vote proxies on the underlying equities in a specific fund. 

Annabel Clark, Programme Manager at the Institutional Investors Group on Climate Change (IIGCC) urged asset owners to “not shy away from being ambitious”.  

“Asset owners have the right to engage with their managers on this and to build a more constructive relationship,” she added.  

Empowering the top of the value chain  

McNamee from the PRI and Clark from the IIGCC both outlined work being undertaken by their respective investor networks to improve the quality and resourcing of engagement and stewardship activities. 

Last year, the PRI partnered with the Thinking Ahead Institute (TAI) and launched a project to investigate stewardship resourcing levels and improve outcomes. In February, they announced the appointment of its Stewardship Resourcing Technical Working Group, which aims to evaluate and review existing and future resourcing practices. It includes members from CCLA Investment Management, Credit Suisse and HSBC Bank Pensions Trust.  

In the coming weeks, the PRI will launch a benchmark study to assess the current levels of stewardship resourcing across industry, with McNamee calling for participation from asset owners to ensure this data is “robust”. 

“By looking at the current levels of stewardship resourcing in the industry, we can then understand what is needed to achieve the explosion of sustainability commitments that have been made in recent years,” said McNamee. 

The end goal is to ensure asset owners conducting stewardship activities in-house will have a clearer understanding of how their peers are tackling engagements. For asset owners which assign responsibility to external managers, the PRI and TAI’s work will “hopefully give asset owners a way to compare different investment managers’ resources and practices”, said McNamee.  

The PRI and TAI plan to publish a report ahead of the PRI in Person 2023 event in October, which will further include a proposed calculation methodology to estimate appropriate levels of resources to both direct and market stewardship activities to have a real-world impact. 

Separately, the IIGCC is working with asset owners to embed stewardship in manager selection and monitoring, following the publication of the network’s Net Zero Stewardship Toolkit, a systematic framework consisting of six key steps that codify best practice for all investors across engagement and voting.  

“Our asset owner members aren’t getting the information they need from their managers to be able to report in line with regulatory requirements or their net zero commitments,” she said.  

Following feedback, the IIGCC started working with a group of ten asset owner members and conducted a gap analysis to “see what was out there in terms of promoting consistency in the information received from managers”, Clark added.  

The first output of this work will be a questionnaire asset owners can use to select, appoint and monitor external managers on climate stewardship. It will be split into a qualitative section, which will have a due diligence focus to support the selection of asset managers, and a quantitative section to assess the alignment of portfolios and the engagements taking place.  

Clark said that the Stewardship Code, which will be undergoing a review in Q3, does help to generate useful information, but insisted there is “still a big gap at the fund level for more granular information on engagement”.  

The questionnaire has been consulted on by the investment industry and regulators, and the IIGCC is in the process of finalising it following feedback, to be published in the next few months.  

Other organisations are also working to streamline and enhance stewardship outcomes for asset owners.  

The Association of Stewardship Professionals (StePs), a member-driven organisation targeting the advancement of the investment stewardship profession, plans to launch the Certified Stewardship Professional (CSP) accreditation on 30 November, which will provide training on stewardship fundamentals, tools, skills and techniques. 

In March, Redington unveiled its Enhanced Stewardship Platform (ESP), a service which aims to help asset owners hold managers to account, focusing on reporting, assessments and engagements.  

All in this together  

While anticipating new guidance on stewardship resourcing and further clarity from regulators, UK-based asset owners are increasingly adopting a collaborative approach.  

If peers, investor networks or NGOs approach London CIV for support in their engagement efforts, the pension scheme’s general approach is to do so unless it has a specific reason or a conflict of interest, Jackson told those gathered at the Stewardship Summit.  

“Whilst we have very limited resources, joining these efforts can help to catalyse widespread action, as it will encourage other asset owners to join the group,” she said, pointing to London CIV’s public support of environmental law firm ClientEarth’s legal action against Shell, which was announced in February.  

The lawsuit alleges that Shell’s 11 directors have breached their legal duties under the Companies Act by failing to adopt and implement a Paris-aligned energy transition strategy. Alongside London CIV, asset owners backing the lawsuit include Nest, AP3 and AP Pension.  

“Collective stewardship can have a really positive impact. Rather than having to respond to 15 separate engagements, it involves one conversation with lots of asset owners who have come together to focus on one core theme or issue,” Jackson added.  

Initiatives to pool resources in the face of systemic risks have multiplied in recent years. Investor-led engagement initiatives like Climate Action 100+ (CA100+) and Nature Action 100 (NA100) give asset owners the opportunity to join forces and drive positive climate and environmental outcomes at some of the worst-offending companies.  

Engagements facilitated by CA100+ contributed to construction and mining equipment manufacturer Caterpillar recently publishing its first Taskforce on Climate-related Financial Disclosures (TCFD) report and disclosing its Scope 3 emissions.  

However, Redington’s Lee warned that there is “an obvious downside” to collaborative stewardship. 

“To put forward a single message to companies, asset owners have to compromise on their views and share engagement efforts and resources with other institutions,” he said, admitting that there have been times he has been part of collective engagements and disagreed with some of the views shared by his co-engagers.  

Other panellists acknowledged this as a factor for asset owners to consider but, by and large, emphasised that, for a resource-starved asset owner, the good of collaborative action often outweighs the bad.  

While ‘divestment’ was not often uttered at a summit focused on promoting effective stewardship, the investment industry must accept that it is a necessary last resort, the IIGCC’s Clark said, reflecting the need for escalation if investors and investees disagree.  

“Asset owners shouldn’t shy away from talking about what should happen when engagement fails,” she said.  

“It gives us the opportunity to consider all the tools in the toolbox.”  

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.

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