Is Cut-price Stewardship Failing Asset Owners?

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    Stockholm (NordSIP) – As the debate over the merits of climate-related divestment versus engagement continues, supporters of the latter have been questioning the efficacy of current stewardship arrangements.  The Climate Action 100+ (CA100+) initiative has been reevaluating its approach following disappointing results with the oil and gas sector.  Several large UK asset owners have also commissioned a review of the voting track records and stewardship practices of asset managers, to be led by University College Dublin’s Professor Andreas Hoepner.  The review was triggered by the investors’ belief that asset managers may be overtly influenced by short-term factors incompatible with pension funds’ long-term interests.

    Aside from potential conflicting priorities, effective stewardship is hindered by the fact that it is not only inherently labour-intensive but also requires skills and experience.  According to Clara Melot, Stewardship Specialist at the Principles for Responsible Investment (PRI), investors are increasingly conscious of the importance of stewardship in driving long-terms returns and improving portfolio resilience in the face of sustainability challenges.  However, there remains a widespread problem of inadequate resourcing.  Melot points to three main factors at play:

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    • Cost cutting within asset management organisations.
    • The belief that spending on stewardship extends benefits to other shareholders (free rider concept).
    • Ill-defined stewardship standards, with a diversity of investor needs and no common performance metrics to justify costs.

    Stewardship resources are often measured in simple quantitative terms, for instance team size.  An IPE asset management industry survey in 2022 revealed an average of 12 ESG and engagement specialists per company, with that figure rapidly tailing off to low single figures for managers with assets under management below €500 billion.  This is the crux of the problem, according to Rickard Nilsson, Head of Stewardship Success at financial technology company Esgaia: “Given how many of these investors hold hundreds if not thousands of companies in their portfolios, investors need to better explain how this situation influences practices, while, on the industry level, we need better guidance and evaluation structures to continue enhancing clarity and accountability.”

    For Nilsson, stewardship is a delicate balancing act.  Shareholders in a company will have a diverse range of different priorities, which could lead to micromanagement and potentially waste management time that could be spent more effectively elsewhere.  “A partial antidote to these issues is collaboration,” continues Nilsson, “which can help reduce both agency issues and partial information problems, adding value that is otherwise lost under unilateral decision-making.”  Nevertheless, even collaborative engagement requires adequate resourcing.  Nilsson believes that to meet the stewardship needs of their clients, asset managers must dedicate appropriate resources to the specialism, specifically:

    • budget allocation (staff, training, tools).
    • Team (size, expertise, experience).
    • Engagement strategy (prioritisation, escalation, collaboration).
    • Knowledge and data-sharing structures (coordination, system capabilities).

    The PRI has formed a Stewardship Resourcing Technical Group in collaboration with the Thinking Ahead Institute (TAI).  The group comprises members of asset management firms, pension funds and data providers.  It is currently running a Global Stewardship Resourcing Survey aimed at better understanding current stewardship practices, resourcing and key stewardship costs.  Investment industry participants are invited to participate before the July 31st deadline.  The survey can be accessed via this link.  The aim is to use the gathered data to inform the provision of detailed guidance on this increasingly problematic area of sustainable investing by the end of 2023.

    Image courtesy of Saeed Kebriya from Pixabay
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