Collective action provides a potent tool to exert ownership influence. While investors face varying difficulty in doing so, we can discern several trends of where investors will focus their efforts next. Here are six areas to keep an eye on:
Enhanced coordination across strategies
The attention on active ownership is leading investors to expand their resources and increase the involvement of investment teams. Aligned with research by Redington, which found asset managers perceived their engagements for change to be more effective on firm- vs strategy level, investors are focusing on training and advanced system capabilities such as central engagement repositories to increase coordination and reduce firm-wide information asymmetry.
Learning how to effectively collaborate with different groups is an important, complex and iterative exercise for investors seeking to improve their stewardship. Accordingly, investors are, both individually and collectively, redefining how they best can exert their influence across the different levels of individual companies, industry, civil society and policymakers.
For example, following the Christchurch terror attack on 15 March 2019, NZ Super, which is a relatively small investor, launched a collaborative engagement campaign on the three main social media companies with the aim to strengthen controls to prevent the live streaming and dissemination of objectionable content. It managed to rally the support of more than 50 like-minded investors representing $3trn in AUM. Aside from its more company-specific activities, the group joined the Christchurch Call to help augment efforts in the area together with a community of governments, online service providers and civil society organisations.
Greater focus on sector/value chain engagements
The gap between the expectations and realities of asset managers’ ownership influence is coming to the fore. Stakeholders are acknowledging the three-dimensional paradox of holding periods, engagement sequences and the time horizons of asset owners.
The average holding period has fallen significantly over the past decades to an average of six months. ESG funds’ average portfolio turnover is now a mere 2.5 years, while engagement sequences generally average two to three years.
Meanwhile, the time horizons of asset owners are often minimum 20 years, and even longer for sovereign wealth funds. Aligned with the universal owner perspective, investors are therefore rethinking their engagement strategies towards more system-level stewardship (for which collaboration is central) to reduce risks across issuer, portfolio, and market level.
Transparency will permeate the market
With growing concerns about greenwashing also in active ownership, and scope insensitivity in impact measurement, transparency is on everyone’s lips nowadays. For example, the Financial Conduct Authority in the UK is proposing a package of new measures including investment product sustainability labels and restrictions on how terms like ‘ESG’, ‘green’ or ‘sustainable’ can be used. As such, investors and companies alike are having to step up their sustainability disclosures.
This will also help address current engagement duplication in the market, which is significant and unnecessary. In 2018, the Principles for Responsible Investing (PRI) estimated more than 168,000 investor-company engagement meetings across their 2,500 investor signatories. Based on investor exposures and engagement prioritisations, many of these activities will have targeted the same companies, often on the same issues, which, given the increased focus on stewardship, will only have increased since then.
Information-sharing will increase significantly
In working towards common goals, and to avoid otherwise rightful scrutiny, investors are reassessing their reluctance to share engagement insights with peers on the basis of competitive reasoning.
Knowing engagement can – if successful – help to reduce risks, increase returns and drive impact, working together will only extrapolate these outcomes. However, to realise the benefits will often require that the market can access and value such information. Thus, while stewardship efforts can have a positive impact on competitive positioning, competitive positioning should not have a negative impact on stewardship efforts.
Enabling technology will experience exponential growth
The increased focus on sustainability across markets has led to the creation of whole new industries. In finance, ESG data and process management is one such example currently experiencing strong tailwinds, which partly has to do with historical underspending in the area.
From a stewardship perspective, there is plenty of room for innovation to help further raise the technological level. In a collaborative engagement setting, aside from the PRI’s collaboration platform, which has become an excellent resource for investors, the industry approach is still very scattered with separate architectures across collaborative initiatives and other “engagement aggregator” types of organisations.
In the future, investors will benefit from more industry-wide architecture, “plumbing” that connects ownership and disclosures with joint engagement profiles and coordination. While certain actions might still be undertaken individually, this will help streamline communications, and provide more effective mechanisms for aggregating complementary information of value to both owner and operator decision-making.