Stewardship limitations call for a more strategic approach

Ideas are emerging on how investor stewardship could become more strategic beyond the ESG, company engagement and proxy voting playbook.

Thursday, July 25th 2024, 6:28AM

by Andrea Malcolm

New insights were shared at a global training programme at Oxford University attended by Aotearoa New Zealand Stewardship code director Rowland Jackson.

Jackson was part of a panel on the evolving regulatory landscape for stewardship along with former director of corporate governance and stewardship of the Financial Reporting Council, David Styles; Harvard Law School deputy dean of finance and strategic initiatives, professor John Coates and National University of Singapore Risk Management Institute, adjunct professor Lutfey Siddiqi.

“Stewardship is about how investors best influence and support the companies they own through critical risks and opportunities to maximise that value”, he says.

Historically in New Zealand companies weren’t as actively involved in supporting the success of companies as they should have been although through stewardship we’re seeing a change here and globally.

Company says No

“Currently investors engage or meet with companies, sometimes across several years, to provide ideas and suggestions of how they can manage risks better. While we're seeing success, we're also starting to see the limitations where sometimes some companies are just saying outright no.”

This is particularly on complex issues like fossil fuel management where oil companies are saying they can't transition in the way investors want.

In one case this led Netherlands-based PFZW, one of the largest pension funds in Europe, to exit investment in more than 300 fossil fuel companies, including Shell, BP and TotalEnergies, over a lack of convincing decarbonisation plans, with only seven remaining in its portfolio.

This marked the end of two years of engagement by the pension fund around transition plans, including a series of increasing criteria for the oil and gas companies in its portfolio, with an initial wave of 114 companies sold after failing to communicate emissions reduction targets, followed by companies without a stated commitment to the Paris Agreement goal of Net Zero by 2050, and finally those who did not produce sufficient short, medium and long-term plans to meet their Paris-aligned goals.

Jackson says while investor company engagement will always be important, as is shown in this case, it's not a silver bullet.

“One of the big takeaways from the [Oxford] programme was the value of broader ways for investors to use their influence, such as at the government and regulatory policy level. We're seeing an increase in investors engaging on policy issues because policy is an effective lever to manage risks. Ultimately, if those policy outcomes are achieved, that comes back to benefit portfolios.”

A local example was earlier this year when New Zealand fund managers, all signatories to the stewardship code, wrote to Workplace Relations and Safety Minister Brooke van Velden about the Modern Slavery Reporting Bill. However the government has since pushed the bill to the backburner.

Another approach investors are starting to take is engaging with the demand side on an issue. “Taking oil and gas users, for example, if engaging with BP directly is having limited success, they could ask how instead they could engage with the users of BPS products and try to reduce the demand of fossil fuels and things through the demand equation,” says Jackson.

Some investors are also looking to support and work with NGOs which are already doing work on risk relevant to their portfolios.

“So, investors are starting to be quite strategic around how they engage and influence risk in their portfolios and different stakeholders, rather than defaulting to only meeting with the company that they have shares in. Rather than defaulting to let's engage with this one company directly, they can consider all their networks, influences and levers.”

Rowland acknowledges that all this requires resources. So far signatories to the local code are New Zealand’s biggest fund managers with dedicated ESG managers. He says he would like to see smaller fund managers come on board. The Aotearoa code was developed to not be too prescriptive and there is guidance available such as an escalation toolkit for investors in corporate debt and listed equities.

Meanwhile in the UK, the stewardship code which is more than 20 years old, is under review with the aim of making it less prescriptive.

Tags: ESG