InvestmentsOct 28 2020

The role of stewardship in ESG

Supported by
Rathbones
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Supported by
Rathbones
The role of stewardship in ESG
Ian Waldie/Bloomberg

Once the initial due diligence has been carried out and the ESG investment made, the next challenge is to ensure that the investments made continue to behave in the way that enable them to demonstrate the desired ESG criteria in the first place.

Stewardship can range from being vocal at the Annual General Meeting (AGM) of the company, to continuing to work with company management on metrics, standard and performance.  

David Harrison, sustainable equity fund manager at Rathbones, says: “Ongoing engagement is a powerful driver of positive change. We maintain regular dialogue with the companies we own to help drive continuous improvement in their sustainability goals and disclosure.  

"This engagement is often a collaborative, not combative process – that is key. We are also using voting [at the AGM] as a tool to target specific ESG issues that may arise and work with other asset owners.”

Naomi Waistell, fund manager at Polar Capital, believes that stewardship is not merely good for ensuring that ESG principles are complied with, but also as a way to ensure the company remains an attractive investment for the future.  

She says: “We analyse all ESG factors in the broader sense of how sustainable, how long-lasting, a business can be, taking into account ESG risks and opportunities. As this is an area that is subject to significant change, in both positive and negative directions, ongoing monitoring and updating of our understanding is vital.

Ongoing engagement is a powerful driver of positive change.--David Harrison

"Engagement is undertaken directly by the investment team - fund managers and analysts - who are best-placed with vast depths of knowledge on each company and sector, and it is done via company meetings, calls, emails or via voting.

"Our approach to company engagement is that of a partnership. We aim to allocate capital to companies which we believe offer the best sustainable economic value added (EVA)By fostering an open, two-way dialogue with them we hope to protect and enhance value for our clients.”

Ama Seery, analyst at Janus Henderson, says that when a company is making demonstrable progress on ESG criteria, this should be viewed as a sign the company is innovative in all areas of business, adding that innovative companies tend to be better investments over the long term.

Annual Angst

>We analyse all ESG factors in the broader sense of how sustainable, how long-lasting, a business can be, taking into account ESG risks and opportunities.--Naomi Waistell

Peter Michaelis, head of the sustainable equity team at Liontrust, says that his team use the AGM to vote against the report and accounts as a way to highlight their disquiet at certain aspects of how a company is run. Liontrust also regularly engages with the companies in which they are invested as a way to monitor ongoing progress.

Mr Michaelis adds: “In 2016, the team began withholding support for companies that were not sufficiently gender diverse: where they had less than 15 per cent women on the board, we voted against the annual report and accounts at the AGM and abstained where this was greater than 15 per cent, but less than 30 per cent. 

As a result twenty-one companies (in which Liontrust are invested) have increased the proportion of women on the board to over 30 per cent, such that Liontrust no longer needs to withhold support. After voting, these companies now have an average of 38 percent female boards, compared to just 22 per cent previous to Liontrust casting its vote.

Mr Michaelis adds: "A further fifteen companies have increased the number of women on their boards, and we remain positive that continued efforts should result in further progress. These companies now have an average of 26 per cent female boards, compared to 17 per cent before we voted on this issue.

"There are thirteen companies where we have seen less progress on increasing gender diversity so we will continue to engage to effect real change."

Central to Liontrust's approach is that all the elements of sustainable investment are integrated within a single team.

Every member is responsible for all aspects of financial, ESG and engagement relating to an investment decision. This means, as Mr Michaelis explains, that engagement is an ongoing part of the process rather than a separate arm. Every time there is a meeting with a company, engagement on a range of issues will form part of the overall stock analysis.

Matt Crossman, stewardship director at Rathbones says: "Engagement, done collaboratively or an individual basis, is crucial to harnessing a better understanding of a company and the key risks facing it. Through regular company meetings with senior management, larger investors are able to draw out key observations that data providers and smaller investors could miss. Investors are able to put senior management on the spot to see whether ESG themes form part of management’s thinking. Conversely, investors can spot and alert senior management to ESG risks which may have escaped management’s notice. Insight from engagement (and voting) should feed back into the investment process and supplement ongoing research."

Data delivery 

>In 2016, the team began withholding support for companies that were not sufficiently gender diverse.--Peter Michaelis

Catherine de Coninck-Lopez, global head of ESG at Invesco, says at her firm the ongoing engagement with companies is part of the corporate governance function of ESG, while the AGM is used to highlight the most serious ESG issues.

From a fund selection point of view, Mona Shah, an ESG specialist investor at Stonehage Fleming, says that as part of her ongoing engagement with ESG fund managers she highlights that technology is available to allow managers to measure the carbon footprint of their fund, and also to move manager’s focus onto additional ESG criteria, such as the UN sustainable development goals.

Francois De Bruin, multi-asset investor at Aviva Investors, says he uses the frequency with which ESG fund managers use their vote at AGMs as a barometer of how committed the fund is to ESG principles. 

David Czupryna, head of ESG at Candriam, describes the voting power an asset manager has as a “weapon” that can be deployed to help with the engagement.

One firm he deployed this approach with was BHP, where he focused on trying to get the company to reduce its exposure to coal, a campaign he says that was ultimately successful.    

Archie Pearson, voting and engagement analyst on the ESG team at Rathbones also believes voting is the “most powerful and often only” tool a shareholder has, but does not believe this voting power is used enough to full effect by some investors.