Investors are increasingly using their influence with investee companies to promote long term sustainable behaviours. We interviewed Emmet McNamee, Head of Progression and Innovation at the UN supported Principles for Responsible Investment (PRI) to find out more about the use of stewardship and how it can deliver for clients.
Evermore investors are realizing they must actively steer the environmental and social direction of the companies they invest in. Stewardship is how investors use various levers of influence, either over the assets they hold, or as actors in the wider financial system, to achieve their clients' investment goals while managing and reducing sustainability-related risks and taking advantage of ESG opportunities.
Through stewardship, clients become part of the transition towards a more sustainable economy, which should impact the overall economy, and could mean higher returns in future. Stewardship promotes positive change, and helps clients invest in sectors that may currently score less well on their ESG metrics, like certain energy companies, but have an important role to play in the transition. Thoughtful and constructive conversations and engagement might improve these industries' sustainability efforts and help push companies to become part of the solution to climate change.
Engagement is where most investors begin their stewardship journey.
Engagement is where most investors begin their stewardship journey, meeting directly with corporate management teams, and communicating their goals for managing the company. These have to be well-prepared, serious meetings, unlike the "tea and biscuits" chats of the past that were little more than social calls. Successful engagement is about quality, not quantity.
Voting is another method, used at the AGMs of listed companies on everything from approving the accounts to electing directors. And as investors are increasingly aware that directors are key to how a company approaches sustainability risks, they focus strongly on the ESG competencies and skill sets of the corporate board.
In November 2022, institutional investors notched up a key victory when Italian energy provider Enel became the first publicly listed company to align its net-zero reporting with a benchmark laid out by Climate Action 100+, the investor-led initiative on climate change. Enel’s net-zero commitment and reporting followed four years of collective engagement by a group of shareholders.
LGT is a member of Climate Action 100+ and a signatory to the Principles for Responsible Investment (PRI), the world’s leading proponent of responsible investment. We believe that stewardship aligns with being a responsible corporate citizen, and taking a long-term, holistic and strategic approach to improving environmental, social and governance (ESG) conduct. Exclusion policies are not the only answer; our stewardship approach combines engagement, voting and public policy advocacy to improve ESG performance and mitigate risks, while maintaining shareholder returns.
Finally, investors can also file shareholder proposals setting out the improvements they want to see from board management. This technique is often used as a last resort, or to escalate an existing engagement, but we expect to see more of it as ESG issues become more urgent.
All the above apply to listed equities and some to fixed income however stewardship isn't only a public markets game. In private market investments, investors also have a range of strategies, with more influence as their holdings may be larger and they have closer links to the companies owned, for example they can take director positions. The other important tool in investor's toolkits is public policy advocacy, which involves speaking to policymakers to make sure the markets are conducive to stewardship.
Various academic studies have shown that good stewardship can create value for investors as it allows investors to be more deeply informed and involved with their investments.
Meeting regularly with investee companies can help investors better understand management, their strengths and weaknesses, and potential for dealing with emerging risks and opportunities. It is also a chance for investors to get a real sense of the company's culture and resilience.
Better information and more informed trading can transfer unrealized value from companies' internal teams to investors. As does improving the sustainability performance of companies by individual or collaborative engagement (unsurprisingly the latter can be faster). A third way to deliver value is through reduced systemic risk.
Achieving this takes big collaborative engagements, which we've already discussed, like Climate Action 100+; Advance, a new human rights initiative; and others such as the Platform (for) Living Wage Financials. To tackle systemic risks effectively, it's not enough to ask companies individually to change their practices. You need to engage with entire sectors and get them to improve their performance, or have policymakers introduce a minimum floor for all companies.
Up until recently, most clients interested in sustainable investment have screened out incompatible assets. It's how responsible investment started: the Quakers excluded assets related to slavery, and eventually this developed into ethical or values-based exclusions. However, it's no longer as simple as a choice between selling these assets or holding them and feeling uncomfortable. As ever, it's important that investors are fair and transparent in their communications around engagement and stewardship, but the opportunities this opens is exciting. Today you can hold an asset and work to deliver real change through a robust stewardship strategy. It's a way to support a just and fair transition to a low-carbon economy, while also investing in tomorrow's leaders.
LGT uses the definition "Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society, on which returns, and client and beneficiary interests, depend." This is based on the UK Stewardship Code and the definition of the Principles for Responsible Investment (PRI), the world’s leading proponent of responsible investment.
