Stewardship grows, exclusion normalising

Corporate engagement and shareholder action was the top responsible investment approach for fund managers in 2022, says the Responsible Investment Association of Australasia (RIAA).

Tuesday, October 10th 2023, 6:55AM

by Andrea Malcolm

In its newly released annual benchmark report, RIAA says the proportion of investment managers reporting on corporate engagement activities and outcomes increased to 40% last year.

RIAA surveyed 70 NZ and overseas-based investment managers claiming to have RI practices for the benchmark and passed 22; 16 who were in the top 20% gained RI leader status, and six earned a newly minted responsible investor status.

RIAA NZ executive Dean Hegarty was heartened by the result which was despiste RIAA changing its RI scorecard to make it harder.

The scorecard covered four areas: coverage and commitment to RI and transparency; enhanced risk management by considering ESG factors and other screens; strong stewardship; and capital allocation to benefit stakeholders, as well as measuring and reporting outcomes.

“It’s the first time we’ve seen shareholder action as the number one RI strategy and that’s off the back of the introduction of the stewardship code last year,” says Hegarty. The previous year engagement was third behind ESG integration and negative screening.

Norms-based screening

The largest shift in RI practice was in norms-based screening which grew eightfold to $125bn from $16b in 2021, research round. According to the report it is now used across three quarters of the RI market.

This follows legislation, climate related disclosure, organisations moving towards zero carbon commitments and the stewardship code,” says Hegarty.

“Rather than screening things themselves, asset managers are meeting protocols required by either the industry and/or legislation.”

Examples include government regulations on KiwiSaver default funds on the level of fossil fuel exposure and RIAA-certification requiring funds to be aligned with the United Nations nuclear protocols which screens out nuclear weapons. More than 80% of RI AUM is screened against the UN Global Compact, UN Guiding Principles of Business and Human Rights, the Paris Agreement and Convention on Cluster Munitions.

“We’ve got to the point where we’re saying, ‘OK we’re going to remove the carbon from our portfolio, we’re now going to make a difference.’ But selling shares in Shell doesn’t change the fact that Shell sits on massive amounts of oil and selling them to Aramco removes the responsibility of Shell to make a transition.

“That’s something, as an industry that we’re now looking at. What does good look like?

How can we use the holdings we have to put climate change pressure on those industries and make them accountable towards the goals we need to reach?”

Voting, where asset ownership permits it, is a key element of stewardship for investment managers. By voting directly or through proxy advisers, frequency of voting is another indicator of investor engagement.

For 2022 RIAA’s research found that 68% of investment managers indicate that they vote across all possible holdings, including directly held equities, mandates for fund managers, or through other third parties . Another 4% said they vote only on issues material to the fund.

The remainder surveyed did not exercise voting rights, often because the asset class does not permit voting (typically fixed income and some alternatives).

Hegarty says the NZ industry is working collectively and collaboratively to drive change. “The Stewardship Code is formalising how fund managers are reporting on things like this. If you're an adviser that's going to make it easy for you to see what the various fund managers are doing when it comes to their engagement.”

He says in November RIAA will launch a working group for asset managers which will supply the opportunity to engage collaboratively and with more cohesion.

Feedback from asset managers is that demand from investors and long term performance expectations are the key drivers for RI growth, says Hegarty.

Despite 2022 seeing an overall shrinkage in the amount of assets in managed funds, by the end of the year more than half the NZ market was invested responsibly, according to the report.

While the total market contracted 3.4% on performance, RI funds’ market share gained 2.5% to account for 52.5% ($183 billion AUM).

The report says demand from investors and long-term performance benefits are now the key drivers for RI, while lack of awareness and concerns over greenwashing are the largest obstacles.

Tags: RIAA