ESG engagement has progressed but there’s a long way to go

Liontrust's Parker looks at how far the asset management industry has come on engagement over the past 20 years

Back in 2001, engagement often involved muscling your way into a meeting, researching ESG issues with a woeful lack of available data, and preparing a financial case for a company to even consider looking at an issue. We had to wait until the end of a meeting where we had a few awkward minutes at to raise questions about ‘extra-financial’ issues or environmental externalities. It was clear most businesses, and indeed fellow investment managers, believed these were not in the company’s field of influence, let alone responsibility.

When so much of the environmental degradation and social inequality has been caused by capitalism failing on a grand scale, financial institutions should lead the changes needed to operate within social and planetary boundaries.

See also: – Podcast: Half of asset managers don’t disclose corporate engagement

Thankfully, this responsibility is now taken seriously and companies are more accountable than ever. In 2006, the PRI got into full swing, giving a louder voice and greater credibility to those engaging on ESG. Meanwhile, swathes of collective and direct engagement by asset owners and managers across a range of issues have pushed for better business practices and driven progress in reporting. Engagement is now recognised as an important function sitting alongside investment decisions and, quite rightly, is expected from a stewardship perspective rather than being just a ‘nice to have’.

Biodiversity engagement

Although engagement has helped in many areas, however, the scorecard when it comes to biodiversity loss and carbon emissions remains well below what our team was looking to achieve in 2001. The recent Dasgupta Review highlights that much of the social progress over recent years has been at the expense of natural capital, describing an ‘impact inequality’ and calling for better balance between what humanity takes from nature and what we leave behind for our descendants.

Our team has been engaging on biodiversity-related issues over the years, focusing on areas including palm oil, timber and plastics. But while we can be sure our clients have avoided the worst-polluting and damaging-causing companies, we have still seen palm oil cause 39% of forest loss in Borneo since 2000. Deforestation elsewhere is still rampant and there are more than five trillion pieces of plastic in oceans.    

Greater effort is imperative as biodiversity loss poses a systemic risk; more than half the world’s GDP is dependent on nature and its services, so this unprecedented loss places us all in danger. It is critical for the asset management industry to engage with companies to limit damaging activities, not least because this is also vital to tackling climate change; despite all our engagement on the climate crisis and improved reporting, CO2 emissions have risen to an 800,000-year high. 

Going back 20 years, impact reporting was lacking in many areas that are now much improved. Our hope is that new investor-backed initiatives, benchmarking tools and company disclosures such as the Taskforce for Nature-Related Disclosures will come together to give us what we need to fully understand and better engage with companies on impacts in this context.

We are also looking to extend our own efforts, with a renewed initiative to encourage companies to do more to protect and promote biodiversity and invest in nature-based solutions and technologies. Through conversations with expert organisations such as ZSL and the Blue Marine Foundation, we can get a better grasp of complex issues and make more targeted requests for change.

The economy and capital markets must be servants of society rather than the other way around. Sustainable investment, alongside focused engagement, is vital in accelerating this transition, especially where it can join up thinking between and action from governments, businesses, academics and NGOs. We have come so far over the past two decades and there is still so much to do; but with more assets flooding into sustainable mandates, and greater momentum behind engaging with biodiversity loss than ever before, it is more likely that we will see timely and transformative change.   

Harriet Parker is investment manager at the Liontrust Sustainable Investment team and an ESG Clarity editorial panellist.

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Natasha Turner

Natasha is global deputy editor at ESG Clarity, part of the Bonhill Group, and has been a financial journalist for six years. She has been shortlisted for Story of the Year and Investment Journalist of...