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Five Common Pitfalls In Investment Stewardship

In this blog post, we outline five areas with supporting evidence for investors to prioritise in their stewardship going forward. A reluctance to address these areas risk leading to a less than optimal strategy, both in terms of resources and impact, so stop multi-tasking and focus!

Viewing stewardship as a cost-center instead of a profit center

Thoughtful stewardship can add value for clients, as discussed in this academic paper which analyses the efforts of a large active asset manager involving thousands of high-level private meetings with issuers globally. The authors show how the firm’s stewardship activities created an information advantage impacting trading decisions resulting in additional alpha.

This firm had a very solid process with well-defined coordination between portfolio managers, analysts, and the governance team. While the results are of course not applicable to all asset managers, there are certain markers we can look for, such as:

  • the expertise and experience of the team,

  • knowledge and data sharing structures, and

  • evidence of investment decisions based on engagement and voting outcomes.

Mixing engaging for information vs change

Engaging for information vs change, monitoring vs engagement, fact-finding vs goal-oriented; whatever terminology resonates, investors should separate the two in their engagement reporting. As noted by the UK Financial Reporting Council, in reference to the UK stewardship code, applicants should distinguish between interactions seeking information and activities with clear objectives. And while there is a role for both, demonstrating effective engagement should reflect the latter approach.

As discussed in this article for ESG Investor, this imposes the difficult task on investors to tier interactions based on intent and the level of effort to stay compliant with these emerging disclosure regimes. Many investors need therefore to evolve their approach in this regard, even if you view your investee monitoring and asset stewardship as one.

Making it a numbers game

As we’ve highlighted before, engagement is first a foremost a qualitative undertaking, requiring significant judgement and activity over a period of time. At the risk of sounding like a broken record, aligned with comments by UK-based investment management advisory Redington in its recent UK Stewardship code analysis, delivering effective change is what matters, not just quantity of activity.

While many of us are guilty of adding fuel to this fire, it’s time we all start to focus on what matters. As such, it’s positive to see how PRI in their new reporting framework ask investors to explain and exemplify their stewardship strategy in practice, including but not limited to investees and the broader market, collaboration, proxy voting, and escalation.

Failing to engage in systematic stewardship

Often commingled with systemic, or system-level stewardship, systematic stewardship offers an approach that serves both investor welfare and social welfare. It rests on the foundation of the universal owner narrative, whereby diversified investors would be better off focusing on reducing systematic - market-wide - risk as a way to improve risk-adjusted portfolio returns.

Interest in the approach continues to rise, with recent academic research and the Net-Zero Asset Owner Alliance's Future of Engagement report and target-setting protocol. It's about articulating merit-based expectations and following through on those using public discourse, proxy voting, and engagement. And focusing on appropriate levers for influence, which would see an increased focus on engaging standard setters and regulators to strengthen the rules of the game, and using collaborative settings to address together sector/value chain issues.

Forgetting about data management

Two common approaches to investors’ record-keeping are to either view engagements as sequences of activities towards specific objectives, or as individual interactions over a specific period. While the former approach suggests there are thoughtful engagement strategies in place, the latter doesn’t necessarily mean efforts are performed in a vacuum. Most often, it simply reflects different disclosure expectations.

Importantly, investors need to think about data management and ensure they have dedicated systems for record-keeping, performance monitoring, and coordination. Capabilities that support qualitative stewardship utilising the full engagement toolbox (including engagement, proxy voting, and public discourse). Without this your engagement disclosures will suffer, and so will your credibility to carry forward effective engagement.

//The Esgaia team


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