ShareAction has released a report showcasing leading examples of asset managers carrying out responsible investment through governance and engagement but pointed out there is plenty of room for improvement.
BNP Paribas Asset Management (BNPP AM), Robeco, NN Investment Partnership (NN IP), BMO Global Asset Management, AXA Investment Managers, L&G Investment Management, Aviva Investors, Schroders and M&G were the most oft-quoted asset managers in the report demonstrating leading engagement practices on responsible investment governance and stewardship, climate change, human and labour rights and biodiversity.
The report, Point of No Returns Part V – Leading Practice, commented last year’s ShareAction survey (titled Point of No Returns) found that in ranking 75 of the world’s asset managers’ approaches to responsible investment found that no asset manager achieved an AAA or AA rating and were being managed in a way that “at best ignored key systemic risks and at worst contributed to them”.
However, there were “clear pockets of leading practice in the industry across most indicators we assessed”, ShareAction said, and as a result has included the Part V report analysing the best practice case studies.
BNPP AM’s accountability for responsible investment is “clearly embedded” at both the board and senior executive levels and accountability structures are publicly disclosed, noted the report. It also praised the company’s training on ESG with group launching a network of 68 ESG champions that sit within investment teams promoting and embedding sustainability into investment process and strategies. BNP PAM’s involvement in collaborative initiatives such as Climate Action 100+ and its biodiversity targets were also noted as positives.
At Robeco, ShareAction pointed to its knowledge-sharing sessions on ESG which occur at frequent intervals and is mandatory for all relevant staff including board members. Robeco has committed to net-zero emissions across all assets under management (AUM) by 2050 and has also set interim emissions targets for 2030. The firm has also applied an exclusion policy for controversial weapons, linked to human and labour rights, where investments related to these areas are disclosed and a three-year enhanced engagement approach, that can culminate in divestment is launched, should controversial behaviour be detected.
The report also noted Robeco’s engagement for targeting “high-impact topics and sectors”, such as palm oil and deforestation, with clearly defined timelines and expectations linked to voting and asset allocation.
NN IP was highlighted for its Client Proxy Voting Policy stating it will vote against the re-election of incumbent directors if there is no proactive oversight of ESG risks. It also has a clear three-year engagement process outlining steps and triggers and for escalation should cases be unsuccessful, and its Climate Change Policy means the group is committed to vote against directors at climate laggard companies and support shareholder resolutions that call for greenhouse gas emissions disclosures.
The full report and case studies can be viewed here.
See also: – Who are the ESG Fund Managers of the Future?
ROOM FOR IMPROVEMENT
Despite the encouraging examples, ShareAction said no single manager implements all aspects of leading practice, which on decarbonisation it summarised as follows:
- Committing to net-zero emissions across all assets under management by 2050 at the latest
- Setting interim targets for emissions reductions for 2030 at the latest
- Taking into account scope 1, 2, and, where material, scope 3 portfolio emissions
- Being consistent with emissions pathways identified in the IPCC special report on global warming of 1.5°C
ShareAction also criticised asset managers for withholding support for ESG resolutions on the basis that they were engaging privately with the companies in question.
See also: – Diving into data, stewardship and engagement will help prevent greenwashing
Isobel Mitchell, report co-author, said: “This is flawed reasoning. Engaging without voting is ‘tea and biscuits’ engagement, providing little incentive for investee companies to change. Asset managers must back up private engagement by voting for ESG resolutions to avoid sending mixed messages.”
There are also concerns about the Net Zero Asset Managers Initiative announced last year. A coalition of 30 asset managers representing $9trn in AUM were the founding signatories of the initiative to support global efforts in reducing greenhouse gas emissions. The aim is to manage assets in line with meeting net-zero emissions by 2050 or sooner with the target reviewed every five years. However, ShareAction said there are risks.
“ShareAction supports collaborative initiatives that set ambitious targets in line with climate science. However, we see a risk that such initiatives may provide a shield against individual accountability and strongly encourage individual asset managers to urgently align their own firm-wide policies with collaborative commitments,” the report said.
Mitchell added: “Current leading practice is still a world away from what is needed of the sector to meet the challenges presented by the systemic risks considered in this report.”
As a result, ShareAction has also released a leading practice checklist that asset managers are encouraged to use to align their approaches with the best in the industry. Furthermore, asset owners and advisers can use the checklist in their engagement with asset managers.
The checklist includes detailed sections on accountability, training, financial incentives, voting transparency, decarbonisation commitments, exclusion policies and engagement programmes.
The full checklist can be viewed here.
In ESG Clarity‘s latest issue of the digital magazine, ShareAction also shared thoughts on best practice when it comes specifically to engagement and stewardship.
“Good engagement is the exception rather than the rule,” said Simon Rawson, director of corporate engagement at ShareAction.
“What we see when we look at investor policies and practices through our asset manager rankings, or when we look at investor voting practices in our proxy voting analysis, is the vast majority of the world’s biggest asset managers are asleep at the wheel on climate change, but also across a much broader range of ESG topics that are now front and centre for most ultimate
owners of capital.”
For the magazine feature, Square Mile Investment and Consulting shared three examples of best engagement practice: EdenTree, Baillie Gifford and Federated Hermes.
The EdenTree responsible investment (RI) team, which works closely with the fund managers, has the ability to veto a stock if a company does not stand up to scrutiny. Alongside company research, the RI team’s members are responsible for voting and engagement with companies, Square Mile said.
If the team identifies potential issues in the initial screens, it will work with those companies to improve, and, once invested, its members will maintain an ongoing dialogue with companies, working with them through any controversies or unexpected events that may occur, and ensuring they maintain high standards.
The RI team also places a great deal of emphasis on what it refers to as ‘thematic engagement’ to identify issues. It then works across a sector and often in collaboration with other groups to ameliorate or eliminate an issue. The results of these engagements are published on an annual basis in the group’s Responsible Investment activity report.
The RI team also drives EdenTree’s thought leadership, which involves producing detailed overviews of sectors, value chains and individual issues that may arise, such as the group’s thoughts on palm oil or sugar.
Baillie Gifford managers deem ongoing engagement with companies as critical to assess and report on how a company has delivered on its financial and impact objectives. They undertake a proprietary ‘positive chain’ assessment for each stock, with the purpose of assigning clear outcomes and milestones for ongoing monitoring purposes. A good level of detail on this can be found in the fund’s annual impact report.
This approach is termed ‘inclusions-based’, for the fund does not use any formal exclusions screening. As an output of the process, Baillie Gifford aggregates the product impact for each company and links it to the United Nation’s Sustainable Development Goals.
Federated Hermes has established an enviable track record of bringing about successful corporate change. Its co-ordinated approach through the EOS initiative is well documented and providing evidence is key to its process. It is also vocal and has published several impressive case studies that show how successful stewardship not only results in
social improvements but in stronger financial performance.