Stewardship, or how investors can promote change by becoming more active owners

Emmet McNamee, what is stewardship?

Emmet McNamee: More and more 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.

What does stewardship deliver for clients?

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 stewardship might improve these industries’ sustainability efforts and help push companies to become part of the solution to climate change.

What tools can investors use to exert influence?

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.

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. In private equity, investors also have a range of strategies, with more influence as their holdings are larger and they have closer links to the companies owned, often including director positions. And of course, there is public policy advocacy by institutional investors, which involves speaking to policymakers to make sure the markets are conducive to stewardship.

LGT is a member of PRI’s Climate Action 100+ and Advance, two collaborative engagement initiatives. How do these work? 

Collaborative engagements are when groups of like-minded investors join together to engage companies on the same issue. They benefit from the scale of the assets behind their requests, plus greater credibility in the eyes of the companies engaged. Take Climate Action 100+. This identified the world’s 166 biggest publicly listed companies and works with them to improve their environmental performance. From zero firms with net-zero commitment, now 75 percent have committed to net zero, and 91 percent have aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Whilst there’s still some way to go, this couldn’t have happened without shareholders’ clear commitments through Climate Action 100+.

Is there any evidence of improved asset performance through stewardship?

Various academic meta studies have shown that good stewardship can create value for investors since it’s a way to be far more deeply informed about the assets they hold. Meeting regularly with investee companies lets the investor understand the 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 management’s culture and resilience.

Better information and more informed trading can transfer unrealized value from companies’ internal teams to investors. As does improving the ESG 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.

Where do you see the potential for private clients to have an impact?

Up to now, 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. 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 investing in tomorrow’s leaders.

So should we no longer exclude assets and just use stewardship?

No, you can still exclude assets that conflict with your ethical values. But stewardship encourages you to analyze not just where the asset is now, but where it potentially could be once investor influence changes its ESG performance.

This means stewardship can expand the investment universe  – if there's a credible pathway to change. If you screen out all oil and gas companies, stewardship won’t change their behavior. But if a company generates, say, 10 percent of their revenues from coal, and your exclusion threshold is 5 or 8 percent, you can have an impact. You can still invest in high-performing energy but choose the least harmful type (gas rather than coal), and work from the inside to create change. 

Another example is mining. Minerals are critical to our daily lives, from iron for steel, to lithium in batteries, to silicon in semi-conductors. But mining is unsustainable, carbon intensive, and often has poor labor practices. Exclude mining companies and you miss out on performance in a growing sector. Stewardship lets you hold these companies and help them change by pushing human rights due diligence, environmental impact assessments, and better practices. This is what’s at the heart of Advance, the PRI’s collaborative engagement for the mining and renewables sectors.

Can you explain why divestment, exclusion and screening alone don’t work?

The public sees divestment as taking money out of a company. If LGT sells 100 million dollars of a petroleum stock, people think the company has 100 million dollars less in the bank. In reality, the shares are sold to another investor, and there's a good chance the new owner is indifferent to ESG problems. The consequence of well-intentioned investors divesting assets is that companies are increasingly owned by parties with little interest in improving ESG

Can we achieve a net zero world without stewardship?

No. And importantly, you can’t divest your way to a net-zero economy. We need to bring every company on board to deal with climate change, and that means remaining invested in companies where sustainable transformation is a real possibility, and using the accompanying influence to support and accelerate change.

Emmet McNamee is Head of Stewardship, Active Ownership 2.0, at the UN-convened Principles for Responsible Investment (PRI).

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.

LGT is a signatory to PRI. 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.