All About the Outcomes
Measuring the impacts of stewardship is far from simple, even as technological innovation begins to smooth the way.
When it comes to driving sustainability-related performance at portfolio companies, stewardship is one of the most effective tools currently at investors’ disposal.
As evidenced during ESG Investor’s Stewardship Summit last month, asset owners are increasingly focused on the outcomes of high-quality engagement – as opposed to the number of engagements undertaken each year.
“Asset owners are increasingly attuned to the fact that financially material risks linked to system-level issues – such as climate change, biodiversity collapse or social instability – are largely undiversifiable,” Clara Melot, Stewardship Specialist at the UN-convened Principles for Responsible Investment (PRI), tells ESG Investor. “As fiduciaries, they may have a legal obligation to consider what they can do to mitigate risks and act accordingly – this is where outcomes-focused stewardship comes into play.”
If an investor has engaged with a carbon-intensive company on its climate-related ambition, a positive outcome may be that it sets decarbonisation targets to include Scope 3 emissions, or that it develops and publishes a transition plan aligned with the UK-based Transition Plan Taskforce’s guidance.
In contrast, a negative outcome may be that the company refuses to raise its ambition, or ditches climate solutions funding altogether.
The importance of measuring and disclosing such outcomes is also coming into sharper focus thanks to an increase in frameworks, codes and regulations requiring investors to provide robust disclosures on their stewardship activities with portfolio companies.
However, despite emerging technology-driven tools designed to streamline the engagement process, measuring the effectiveness of stewardship outcomes remains challenging for asset owners and asset managers for a plethora of reasons – such as a lack of standardised metrics, accurate attribution, limited visibility, to name but a few.
“Asset owners have always been keen to take an outcomes- and materiality-focused approach to stewardship as part of their fiduciary duties,” notes Caroline Escott, Senior Investment Manager for Active Ownership at UK pension fund Railpen. “This approach is fundamental to help asset owners make the most of a finite level of stewardship resource and ensure they push managers on the critical issues that matter most to member outcomes.”
The right metrics
Although there are various metrics investors can use to assess the effectiveness of their stewardship approach, these do not cover the full spectrum of engagement themes.
Investors can track direct activities, such as the number of companies engaged with over a 12-month period, or the number of votes cast by an asset manager during the latest proxy season, for example. But these measurements represent outputs, not outcomes.
There are some examples of standardised and quantitatively measured outcomes across specific themes, including reduction in greenhouse gas (GHG) emissions and the gender balance of board composition. But it becomes more difficult to measure the impact of stewardship on board effectiveness, human rights, and company culture and conduct.
“Monitoring stewardship efforts and progress is crucial, but there is no single metric that adequately captures effectiveness,” notes Melot. “The milestones and outcomes targets should be issue- and context-specific – and so should the strategies deployed, and the metrics used to assess progress.”
Another layer of complexity comes into play when investors look to compare their stewardship impact across portfolio companies.
“Many indicators are tailored to a company or sector, or involve unique methodologies that make comparability difficult,” explains Amy D’Eugenio, Sustainability Director at Federated Hermes. “Without standard baselines or regularity in reporting, it’s difficult to make comparisons.”
Genuine change can take time and look different for different companies, she adds.
Attribution of these outcomes is challenging, too. After all, stewardship doesn’t happen in a vacuum, and companies are engaging with multiple investors at any given time that may have the exact same goals. Some of a company’s changes may also be made in response to new regulation or legislation. As such, it’s therefore difficult for an asset owner or manager to determine the extent to which they are directly responsible for a company’s change in behaviour, new policy, or action plan.
“No investor actually delivers the outcome,” points out Paul Lee, Head of Stewardship and Sustainable Investment Strategy at investment consultancy Redington. “Ultimately, the decisions and changes are made by the companies, so investors will never know all of the factors and drivers that influenced them.”
A fairer way to prove causation between an investor’s stewardship activity and corporate outcomes would be to demonstrate correlation, Lee suggests. “To do this, an investor would need to set its engagement objectives at the start and measure related outcomes at the end of the engagement period,” he adds.
Quality over quantity
Asset owners must deal with an extra layer of complexity when they assess the stewardship outcomes of engagements undertaken by their external managers.
“Currently, much of the reporting produced by asset managers focuses on the number of engagements undertaken (and on which issues), accompanied by a handful of case studies on specific engagements,” says Escott from Railpen. “Unfortunately, this provides asset owners with limited insight as to the thoughtfulness and impact of their manager’s stewardship activities across the whole set of their investments.”
A 2023 report published by Redington analysed the UK Stewardship Code disclosures of 44 asset managers, finding “huge variability” in the number of engagement actions reported. While one asset manager reported 5,312 engagement actions over 12 months, five others recorded 200 or fewer over the same period.
“It should be about the quality of these engagements, not the quantity,” says Lee, questioning whether asset managers currently lack the technology or access to data to sufficiently demonstrate outcomes.
It’s imperative that asset owners outline their stewardship expectations to asset managers from the outset, suggests Joe Dabrowski, Deputy Director at the Pensions and Lifetime Savings Association (PLSA). “Asset owners need to be very clear about the strategy or mandate they will be setting for their managers, and how they expect information to be reported and acted upon.”
Factors investors may consider when evaluating the effectiveness of their stewardship practices include whether they are targeting the right outcomes to achieve real-world impact, engaging the right stakeholders, and making use of all available tools – such as collaboration and policy engagement.
“Successful stewardship requires an in-depth understanding of the target company, built on previous interactions with the business, as well as an awareness of when and how to use the different tools in your toolkit at key moments to maximise influence,” notes Escott. “This means that investors need either one system that brings together all the relevant engagement, voting and research information – and helps track progress – or a few different systems that work seamlessly with each other.”
Perseverance
Although experts acknowledge it will likely take years before investor stewardship is suitably robust and its outcomes quantifiable, solutions are beginning to emerge.
“We need stewardship to be more ambitious, with a sharp focus on delivering real-world outcomes on critical systemic issues which put financial system stability, long-term value, and beneficiary interests at risk,” says the PRI’s Melot. “To get these, we need collaboration and stronger policy engagement. Such a shift is attainable, and we have already come a long way, but it will require persistence and further resources.”
Technological advancements are underpinning new tools that allow investors to better demonstrate their stewardship priorities and progress to clients.
“Technological innovation can help to ease the [measurement] process in many ways, such as between the asset owner and manager and portfolio company, but also when – in the case of pension funds – engaging with [beneficiaries],” notes Dabrowski.
Firms like rezonanz, launched earlier this year, aim to provide improved voting and engagement analytics for asset owners to bolster their stewardship efforts and improve visibility of asset managers’ activities. The group plans to introduce an engagement tracker by the end of Q2.
In 2022, Fidelity International and investor engagement fintech Tumelo created a stewardship hub for pension funds, trustees and advisors to better enable them to examine underlying fund holdings and actions taken by fund managers on stewardship activities.
Meanwhile, Verity Platforms has designed and implemented an integrated stewardship platform for investors called Stwrd, which sources relevant and actionable sustainability-related research through AI and holistic analysis which investors can integrate into their engagements with companies.
“Measuring stewardship outcomes is both a data challenge and a problem of scale,” says Jeffrey Marsh, Verity Platform’s Founder. “Investors who are willing to allocate reasonable resources have access to the tools necessary to capture all their stewardship data, but many do not exploit them. We see that changing now, as pressure from asset owners has ratcheted up, but many managers have [been] procrastinating.”
Last year, the PRI published a due diligence questionnaire and an evaluation tool under its Active Ownership 2.0 initiative, with goals to help asset owners better assess how asset managers are contributing to sustainability outcomes through stewardship efforts.
With an activity as nuanced and varied as stewardship, however, persistence, transparency and collaboration will all be key.
“Without an investor’s ability to hold company executives and managers’ feet to the fire, we won’t have a world where stewardship can make an impact,” says Dabrowski.
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