According to the UN PRI, active ownership refers to the use of the rights and position of ownership to influence the activities or behavior of investee companies in which investments are made (1).
One of the most important responsible investment strategies for investors is active ownership. The market increasingly recognizes the role of engagement and impact investing (in otherwise capital-constrained companies) as primary drivers of influence that can lead to real-world impact. This in turn makes active ownership one of the fastest-growing ESG strategies globally, which also results in increased scrutiny from both stakeholders and regulators.
Having a well-articulated and credible active ownership strategy is becoming a hygiene factor for investors. While active ownership has been most prominent in listed equity, we are seeing steady growth in other asset classes too. For example, the UK Stewardship Code demands signatories to exercise stewardship across all asset classes and geographies in which they are invested. Investors are expected to use the resources, rights and influence available to them and report accordingly.
Policy statements are not enough
There are valid criticisms around the efficacy of investors’ active ownership practices. Take a study from the EDHEC-Risk
Institute for example, which looked at what impact institutional shareholders’ climate engagement had on investees’ carbon footprint between 2007-2018. The authors found that it did not in a meaningful
way reduce the footprint, except for the most polluting companies, for which however the reduction had a limited magnitude. In effect, they partly concluded that responsible investors can help the decarbonisation of investees and increase the level of impact if their active ownership becomes more effective. In other words, while some investors claim their approach reflects solid engagement practices and meets high expectations, when you look under the hood, many investors will lack a structured process, with far from responsible activity levels. This in turn undermines the intent of active ownership, ultimately leading to a lack of tangible progress and engagement essentially being used as a greenwashing mechanism.
A qualitative approach on the other hand will have as much to do with the people, processes and systems on which these strategies are built as it does with communicating that message through policies and stakeholder reporting on activities and progress. Well-executed active ownership strategies can in turn then lead to documented positive engagement impacts on financial returns, decrease of downside risk, and as an enabler of real-world change.
For additional insight, please read our three-part blog series covering the engagement process, with views on evolving expectations and market practice for more effective active ownership.