In this series, ESG Clarity takes a deep dive into an investment firm’s stewardship activities, discovering their key focuses and processes, and what’s in their engagement toolkit.
Here, Rachael Monteiro, stewardship and climate analyst at Wheb Asset Management, discusses the less well-known stewardship trends and how the group is focused on helping clients understand how issues are selected and prioritised.
What do you think will be the key trends in engagement and stewardship this year?
Though not a new concept, investor stewardship and engagement are increasingly being recognised as a key catalyst for effecting change and delivering tangible real-world outcomes. Consequently, it will likely continue to play a significant role in addressing systemic sustainability issues such as climate change, biodiversity and nature and human rights throughout 2024.
But we think another key trend, that is currently less talked about, will be heightened scrutiny of asset manager stewardship practices as clients become more discerning in their evaluations.
Early signs of this appeared in 2023. Some investors have responded to the increased market focus on stewardship by intensifying engagement efforts (and related disclosures). However, the quality of some of this work was quite publicly called into question last year.
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Greater scrutiny is something we would welcome. It’s understandable that clients ask for the usual metrics that seek to quantify activity, such as the proportion of the portfolio that is engaged, the number of topics addressed etc, but there is an excessive focus on them. And it can be disheartening to feel that all the time and effort we have invested into deep, nuanced stewardship work might be reduced to a few percentage scores.
Instead, we think (or perhaps hope!) that there will be more opportunities in 2024 for us to help clients understand how issues are selected, prioritised and then addressed. Where this is done in the context of the long-term success of investee companies, stewardship becomes a very powerful tool.
What is your firm focused on achieving with investee holdings?
As mission driven positive impact investors, we see it as our responsibility to help companies take a longer-term view. We put enormous amounts of effort into engaging with portfolio companies and are very targeted in our approach.
Analysing and prioritising material issues as they relate to each stock is how we achieve this. Compared with taking more of a top-down approach, we find this helps us clearly contextualise engagement objectives within the business case. This makes more sense to company management, which helps us maximise outcomes.
Where are clients putting pressure on asset managers to improve engagement?
Pressure from clients hasn’t always aligned with what we consider higher-quality stewardship practices. A key example is the implicit expectation to demonstrate action on some topics across the portfolio, even where they are not material for all stocks.
This has been the case on biodiversity and nature loss. This is undeniably a critical sustainability issue and one we take seriously, as seen through our direct engagements as well as the work we are doing via initiatives such as the Nature Action 100. Yet, the reality is that this topic is a material priority for only a small sub-set of our holdings.
Still, we have systematically engaged those companies to address both the related risk and opportunities and communicated this approach to clients. There is a danger though, that a less sophisticated approach might lead an asset manager to prioritise showcasing action across its portfolio, possibly at the expense of conducting meaningful engagements and neglecting other more critical issues.
In which areas are you collaborating on engagement with other asset managers?
In 2023, we addressed net zero carbon targets, biodiversity, and phase out of hazardous chemicals through our collaborative work.
There are some excellent initiatives supporting investor collaboration through coordination of efforts and accessing specialist NGO expertise. ChemSec’s Investor Initiative on Hazardous Chemicals is a great example of this – one of our targeted investee companies recently emphasised how valuable their input has been in developing a strategy.
The same can’t be said for all initiatives though. We’ve found some can pursue agendas quite aggressively, which can be counterproductive. This is why it’s so important for investors to be active participants and use their expertise and ensure that objectives are framed in a way that makes sense for the business and are not presented as ‘campaigns’.
How is your engagement toolkit evolving?
A recent focus has been looking at how to improve the clarity of our stewardship reporting. We see this as a vital part of our toolkit as it provides clients with a sense of accountability.
We make all our stewardship data publicly available as a form of assurance for clients. However, we know that many don’t have the resources to sift through large quantities of raw data and, frankly, nor do we think they should have to. Equally, we produce many case studies throughout the year but they provide only a snapshot and, alone, they can be accused of being ‘cherry-picked’.
We have therefore been trialling ways of depicting the much broader, methodical processes that case studies sit within as well as their correlation with real-world outcomes.
Using our work on net zero, we presented an example of this at our Annual Investor Conference in November to positive initial feedback. So, we’re keen to continue developing this tool and expand coverage for other core issues such as diversity, biodiversity and hazardous chemicals.