Proactive dialogue with companies, reinforced by voting power, can encourage them to improve practices that strengthen sustainability. Recent global events – the pandemic, the pain of racial injustice, wildfires – have ensured stewardship is more important than ever, reminding us of how much we all must do to effect change and improve the world in which we live.

    A virtual roundtable discussion on the topic of stewardship organised by NordSIP on September 1st brought together a panel of leading experts from across Europe: John Howchin, Secretary-General of The Council on Ethics of the Swedish National Pension Funds, Julie Moret, Global Head of Sustainable Investing & Stewardship at Northern Trust Asset Management (NTAM) and Oliver Grayer, Programme Leader of the Corporate Programme at Institutional Investors Group on Climate Change (IIGCC).

    Insistent, Persistent, Consistent

    Following a short introduction, the panellists dive straight into the topic, explaining what good stewardship means to them and the organisations they represent. Since its formation in 2007, the Council of Ethics, a collaborative effort between Sweden’s First, Second, Third, and Fourth buffer pension funds, has conducted dialogues with several thousands of listed non-Swedish companies. Many of these dialogues have been constructive and led to tangible improvements. Unsurprisingly, therefore, Howchin stresses the importance of proactive engagement and long-term commitment in his introduction. “Stewardship is very time-consuming, and the changes are often incremental. You have to have patience,” reflects Howchin, adding that, unfortunately, the issue has become politicised lately.

    “There is, in our mind, an optimal approach around engagement,” asserts Moret in her opening remarks. She briefly introduces NTAM’s systematic and goal-oriented stewardship process, from identifying material issues that could impact the financial condition of a company to assessing the engagement outcome. “It is incredibly critical to remain both persistent and consistent,” she points out, stressing the importance of following through and monitoring progress after initiating a dialogue by raising a concern.

    Admittedly, prioritising is slightly easier for IIGCC as the organisation focuses on one material ESG issue only, climate change. The issue itself is enormous, however, given the tightening ecological budget, as Grayer points out. “We support collaborative engagement,” he explains. The work is often structured around sector groups, as different sectors face different challenges and follow separate development paths. Gayer also mentions the ‘Net-zero stewardship tool kit’ currently being developed by IIGCC to assist investors in their engagement efforts.

    Transcending Differences

    “At the heart of most engagements, we see a common process,” says Grayer. All shareholders’ engagement work has the annual proxy season as its focal point. Both active and passive investors prepare similarly and go into intensive dialogues before the AGMs. According to Grayer, active and passive managers engage very similarly. Fixed income and equity investors and investors in different regions and markets may have more differentiated approaches.

    “Wearing an active-engagement co-owner ‘hat’ transcends different investment strategies,” Moret agrees. For her, it is more important to be clear on the purpose of the engagement, and on where and how one can have the greater impact. “There is strength in numbers,” she stresses, advocating passionately for joining collaborative initiative ssuch as the Climate Action 100+ initiative or the Sustainability Accounting Standards Board (SASB) that are particularly well-aligned with NTAM’s priorities.

    Getting Priorities Right

    According to Howchin, choosing where to focus the engagement efforts is not a trivial task. He reflects on the need to prioritise the bigger portfolio holdings, even if some of the issues that smaller holdings are involved may seem very important. For example, there might be an interesting opportunity to engage with Brazilian beef giant JBS on deforestation in the Amazon, but the position held by the fund is tiny. Whereas tech companies which represent very large holdings might offer engagement opportunities on other themes, such as human rights. Balancing those priorities is crucial and efforts need to be put into perspective given the underlying assets, especially when engagement resources are limited.

    Howchin, just like Moret, believes that collaborative initiatives, like Climate Action 100+, are crucial to guiding stakeholders’ efforts in the same direction. “We are all part of a stakeholder economy, and if you are oblivious to this, you are blind. It is all about stakeholders engaging together,” he adds. Working in concert makes it possible to focus on the parts of the economy that are especially challenging to change, such as steel, trucking, cement, chemicals, mining or real estate, for instance, and their respective value chains. For the transition to happen and to preserve the trust in the industry, these difficult challenges can’t be left aside. “We need to step up, going from engagement to ‘hard-core’ ownership,” he concludes.

    Climate Requires Action

    The IIGCC is one of five investor networks who founded the Climate Action 100+ initiative in 2017. Identifying the 100 largest emitters and building groups of investors around each of them to engage for change has been a successful strategy so far, according to Grayer. Over half of the companies have already committed to net zero, about half have carbon targets, and almost 80% produce TCFD reports. The remaining gaps are primarily in emerging markets and among state-owned companies, he adds.

    Grayer agrees with Howchin on the importance of engaging throughout the whole value chain. “Despite their ambitious targets, ArcelorMittal cannot get to net-zero steel if there are no buyers for net-zero steel,” he explains. He emphasises, therefore, the need for coordinating the efforts, analysing the strategic problems holding everyone back and organising investors to help resolve some of them. Solving such “existential value-chain challenges” is undoubtedly a priority going forward.

    Both the Council on Ethics and NTAM are working actively with IIGCC on the Climate Action 100+ initiative and share some of the results achieved. The newly released report on steel is a laudable outcome of the collaboration, Howchin points out. Commodity-tranding and mining giant Glencore is an example of the companies NTAM has engaged with. In 2020 the company committed to achieving net-zero by 2050 and has already enhanced the interim target since. “Engagement and monitoring don’t stop there, though,” Moret is careful to point out. Once a company has announced a commitment, the process moves to different areas, such as how the company’s business strategy aligns with the new target pathway or how the executives’ remuneration and lobbying policy fit in that overall strategic plan.

    Moving Beyond Climate

    At this point, Moret reminds us about the importance of engaging with companies on other sustainability issues, apart from carbon emissions and climate change. She is particularly passionate about social aspects such as diversity, equity, and inclusion which are also a strategic priority for NTAM. Being introduced to the NTAM’s executive committee upon joining the firm recently, she was impressed that 65% were ethnically, racially and gender diverse. “I felt that there was not only the rhetoric but also the action behind,” she says. According to Moret, setting the bar high for one’s own organisation makes it easier to demand the same of investee companies. This inside-out approached has allowed NTAM to successfully engage on board diversity issues from a position of integrity. “In a post-Covid world, everyone will need to reassess their role and how it all fits together,” agrees Howchin, speaking about the increasing importance of tackling uncomfortable social issues.

    Mapping Progress

    The discussion moves on to the ubiquitous data challenge that investors face when mapping and monitoring engagement progress. Ensuring that there are enough data points to drive voting policies is, according to Grayer, “ground zero”. Supporting shareholder resolutions and exercising director votes has already accelerated. “What I would expect more of in the future, however, is the use of auditor votes,” he shares. Although for this to happen, the correct data will need to be collected and the right policies to be written first.

    Moret describes how NTAM is attempting to tackle the challenge of monitoring and measuring engagement success. To help structure the process, the firm uses a ‘four key milestones’ framework. NTAM also uses a proprietary scoring tool, the Northern Trust ESG Vector Score which provide a multidimensional measure on how companies perform on sustainability issues. “These help us fine-tune additional data points and highlight the particular issues and topics for our engagement,” she explains. Moret also points out the importance of the work NTAM does with SASB to “provide a greater clarity to corporates around what are the most decision-useful disclosure requirements as there is a myriad of frameworks and approaches”.

    Sometimes the results speak for themselves, though. Howchin brings up the example of engaging with mining companies to improve the safety of tailings dams after the Brumadinho disaster. With new international standards now in place and more and more mining companies embracing them, hopefully, new disasters can be averted. It takes time, he admits, but mining has been around for 30 000 years, so we shouldn’t expect any quick wins. “Our comparison is always divestment,” says Howchin, looping back to his opening remarks. “It’s easy to divest, whereas the alternative, engagement for change, is very long-term, and you need to be patient.” It is precisely what the Swedish pension funds can do, being long-term stewards.

    A Call to Action

    In their concluding remarks, the panellists get to formulate, as concretely as possible, their call to action. “We are always looking for people to help us operationalise the actions and interventions to achieve net-zero,” says Grayer, inviting investors to get involved in the work of IIGCC and Climate Action 100+.

    “Don’t be scared to build a culture of stewardship, even if it takes time, as there is a lot of inertia in the system,” urges Howchin. “And don’t let politicians and NGOs hijack what we are trying to achieve here and simplify the message,” he adds.

    Moret reiterates the need to be focused, persistent and consistent. “Find opportunities where you are able to engage, and not just with corporates, but also with policymakers and regulators,” she concludes.

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