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Stewardship: Rules of engagement

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8 Nov 2024

Investing in a company is only the first step in creating your desired portfolio, but the journey is far from smooth. Mark Dunne reports.

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Investing in a company is only the first step in creating your desired portfolio, but the journey is far from smooth. Mark Dunne reports.

Investing with purpose is not easy. Institutional investors looking to build a more sustainable world and reduce inequality need to be resilient.
 It could take years to change a corporate’s operating practices to make your portfolio greener and fairer while creating long-term shareholder value.

This is where investment managers play a key role through dialogue with a corporate’s leadership and voting on an asset owner’s behalf.

When it comes to stewardship, Brunel Pension Partnership’s asset managers are its “first line of defence”, says Brunel’s head of stewardship, Vaishnavi Ravishankar. They are responsible for all of the pool’s portfolio risks and engage on its behalf.

Brunel, which manages around £37bn of assets on behalf of 10 local government pension schemes in the South and South-west of England, lists climate change, biodiversity and human rights as its top responsible investment priorities.

The pool also wants its managers to focus on tax fairness, the circular economy and cybersecurity as well as diversity, equity and inclusion.

These systemic risks became priorities following discussions with its member schemes. Brunel now works closely with its investment managers to make sure these issues are considered when managing the assets.

“Our expectations are the floor, not the ceiling,” Ravishankar says. This approach provides asset managers with the flexibility to employ various analytics and frameworks to meet the pool’s expectations.

Different strokes

When it comes to how best to approach stewardship and engagement, there is no one-size-fits all model. It differs across asset classes and also depends on the investment style of the asset manager.

“There is no single answer to what is good stewardship,” says Michael Marks, head of stewardship and responsible investment integration at Legal & General Investment Management (LGIM).


The approach for an active equity investor is different to that of an active fixed income investor, which is different to a private equity investor, which is different to an index investor.

“In private markets, if you own a significant holding in a company then you have greater influence over its management,” Marks says.


But stewardship is more important to index investors. “They cannot choose whether to own a company or not,” Marks says. “Therefore engagement is the tool to help improve the long- term returns of the portfolio.

“If you are an index investor who thinks like a universal owner, you are looking to raise market standards across the board,” he adds. “If you are an active boutique, you are looking at raising the performance of the individual company.”

Stewardship is not easy but worth the e ort when compared with what could be achieved. “If engagement is carried out effectively, it can be a powerful stimulator of change in company practices,” Ravishankar says.

But the path to success is not straightforward and so requires resilience. “It’s important to acknowledge that engagement progress can never be linear, and it often takes time to bear fruit,” Ravishankar says.

Investors, therefore, need to understand the underlying process. For example, what’s the theory of change? What escalation pathways are under consideration? When will they be used, and within which timeframes?

Getting round the table

One of the repeated concerns with stewardship is that asset managers may not be aligned with the wishes of asset owners when implementing climate stewardship on their behalf.

LGIM has six core investment stewardship themes when managing its clients’ capital: climate, nature, people, governance, health and digitisation. Whether they build a greener world is not necessarily the main focus of the engagements they conduct on behalf of their clients; but generating long-term out- comes is and this may deliver a greener world, Marks says.

To examine the issue, an investor group was formed. Late last year, a review by the UK Asset Owner Roundtable, which counts Border to Coast, Brunel, Nest and USS among its members, found that such concerns are credible.

“The roundtable brought these sides together and we ended up having quite a constructive conversation,” Ravishankar says. “There was an acknowledgement that a gap existed, and there was willingness from both sides to look at possible solutions.

“One of the key messages from asset managers is they want investors to have a collective voice when it comes to expectations around climate stewardship, because they were seeing a divergence in terms of their clients’ views around this issue,” she adds.

In response, a number of asset owners are putting together a statement on what they expect from managers in terms of climate stewardship. “We’ve taken this feedback on board,” Ravishankar says.

Evolutionary times

All of this comes at a time when stewardship is going through a “phase of disruption”, says Leanne Clements, head of responsible investment at People’s Partnership, which provides The People’s Pension.

The stewardship proposition has traditionally been led by fund managers, but Clements believes that could be changing. “What I’m seeing lately is a shift where asset owners are starting to rise in terms of their voice,” she adds. “You’re seeing evidence of that through the new stewardship propositions that are being presented by fund managers.”

It’s not just about individual asset owners. Disruptors also include the Taskforce on Pension Scheme Voting Implementation.
“Seven years ago, no fund manager was willing to talk about it. Well, today the landscape is an entirely different world, and it’s creating a lot of disruption,” Clements says.

“A lot of people are complaining about that, but I welcome it,” she adds. “It’s a necessary evolution to where we need to be as a demand-led industry with the owners of capital at the top of the chain driving what they need from their fund managers.”

A targeted approach

In April, Clements said the days of “tea and cake engagement” have gone. Instead, she wants fund managers to adopt a targeted approach “routed in a robust theory of change”, where limited resources are used as effectively as possible. This will include executing robust voting escalation strategies.


Yet it is too early to say if the message is getting through. “It’s a work in progress,” Clements says.

“It’s just about consistently sending that signal through the monitoring program.
“Rome wasn’t built in a day when it comes to these things,” she adds.

Clements hopes that a targeted approach to stewardship will eventually be rooted in responsible investment policies and become part of monitoring programs.
 “It is early days, but I can see a positive evolution with respect to it.

“It is not something where you can snap your fingers and it’s going to happen overnight, but the conversations are happening. It’s just a matter of embedding them into the processes. So let’s talk [about this] in three years,” she adds.

Let’s work together

Another challenge with stewardship is that there’s a lot of ground to cover. “Where we are failing is we are spread too thin,” Clements says.
The answer, she adds, is to be clear with investment managers on the targeted areas you want them to focus on.

“With that spirit in mind, I’d love to get all of the key asset owners in a room and do a big mapping exercise of the barriers to the sustainable financial system to identify key focus areas where we could achieve maximum impact,” Clements says. “Then we need another mapping exercise of the industry, of who’s doing what and where with respect to those focus areas, to see if there are any gaps.”

The third phase is to identify leads within each focus area, depending on the skillsets of the asset owners. Then establish a working group for each focus area.

“This is a case study to highlight what we need to do, which is sharing the workload,” Clements says.
Asset owners engaging in targeted areas include the Church of England Pensions Board’s work to improve environmental and social standards in the mining industry and Railpen’s engagement on dual-class shares.

“We need more of these focal points and more people leading, like they are,” she adds. “We will achieve much more maxi- mum impact, as opposed to us all working in silos and spreading ourselves too thin.”

This is what Clements sees as the way forward for the industry. There is a lot of work to be done here so more owners of capital will have to get involved. “It can’t just be asset owners like Railpen, Church of England Pensions Board and Brunel carrying the load of addressing systemic challenges in responsible investment.”

But this is not only about large asset owners. Those with limited responsible investment resource could also play a part. “The important role for them is to just lend their AUM [assets under management],” Clements says.

“So if there is any initiative coming out in which we need to exert in uence through AUM, they can lend their AUM.” Ravishankar welcomes the idea of sharing the workload among asset owners. “From a point of efficiency, it’s a no brainer,” she says. “It enables significant progress.”

Artificial support

Another area of progress within stewardship is the increasing use of artificial intelligence (AI). Brunel is using AI to improve the efficiency of its stewardship functions. “It’s important to move with the times and embrace technology where we can,” Ravishankar says.

So far, the pool has used AI to refresh and monitor the implementation of its voting guidelines, which, she says, “reduces time and effort”.


“It also enables us to stay ahead of the game through picking up new issues and themes that maybe other asset owners or managers are working on.

“That’s the direction of travel we expect in the coming years,” Ravishankar says.
 And it’s a direction LGIM is taking. For instance, to build an accurate picture of a company’s carbon emissions, data across thousands of pages from various company and sector reports needs to be digested.

“We use AI to trawl the internet for the data and categorise it to help inform our decisions,” Marks says.

Time to say goodbye?

If all of innovations and approaches to stewardship mentioned throughout this article fail to produce the desired outcome, investors could always end their exposure to such companies. But for Ravishankar, divestment does not mean that stewardship has failed. It is just one of the many tools in the stewardship toolbox.

“It is not appropriate to use [divestment] at the drop of a hat,” she says. “Like any other lever, we use it deliberately and cautiously, particularly when other stewardship options haven’t quite worked.”

It is an issue on which asset owners and asset managers agree. “Divestment in its own right, is not an outcome,” Marks says, adding that the threat of exiting an investment can be a powerful motivator.

If companies are not making enough progress on improving their operations or are refusing to take engagement with LGIM seriously, they could find themselves on the divestment list, which is published yearly.

“The publicity that goes alongside that is another tool in the stewardship armoury that helps engage companies,” Marks says. 
“We’ve had occasions where we have published the list and within 24 hours a company we have struggled to engage with have come to us asking what they have to do to come o of our divestment list.

“If you’re not owning the company, you can’t drive change,” he adds. “So we believe in engagement rather than divestment, but as a tool it is powerful.”


And it needs to be powerful. Change is needed in a world facing systemic threats such as climate change and nature loss alongside growing inequality.

But this is not going to be easy, making the call for greater co-operation between asset owners, their managers and the companies they invest in appears a credible strategy.

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