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How Technology is Transforming Stewardship

How Technology is Transforming Stewardship

Asset managers and owners are using AI and other innovations to vote and engage with companies more effectively and efficiently.

The volume of stewardship activity has evolved considerably in just a few years, leading many asset managers to either buy or build their own technologies to improve the efficiency with which they interact with investee companies.

“Five years ago, we were still running a lot of things through basic Excel,” says Michael Herskovich, Global Head of Stewardship within BNP Paribas Asset Management’s (BNPP AM) Sustainability Centre. A spreadsheet would be used simply to record that BNPP AM had spoken to a certain company, along with the date of the interaction.

But against a steady onslaught of regulation, sustainability requirements and client demands, many asset managers are now buying sophisticated technology platforms – or developing their own – in the hope of gaining an advantage over their competitors. AI is, unsurprisingly, expected to be central to the modernisation of stewardship in the coming years.

Technology is “impacting the whole engagement process”, says Rickard Nilsson, Head of Stewardship Success at platform provider Esgaia, “from research and dialogue to progress monitoring, data management, and reporting”. It’s also providing greater choice and transparency in related areas, such as proxy voting.

Overall, stewardship remains an under-resourced area for now. Research by the Thinking Ahead Institute of 49 asset managers and 20 asset owners published last year – with total assets under management of US$16 trillion – found that for both asset managers and asset owners, stewardship resources accounted for 7% of total investment resources. Engagement represented the largest proportion of their stewardship resourcing.

Expectations are rising globally, driven in part by ESG and stewardship regulation, the report highlighted, noting also that engagements are becoming more complex as the emphasis of engagement shifts “from disclosure to action”. Twenty-eight per cent of respondents set their desired level of resources allocated to stewardship at three times the current level, with the same proportion setting this at ten times the current allocation.

Source: Thinking Ahead Institute, 2024

“I think stewardship is ripe for improvement, especially when it comes to efficiency,” says Mais Callan, Co-founder at Impactive, a cloud-based platform that tracks, reports and analyses engagements.

Making voting ‘more available and transparent’

Shareholder votes are a central component to the investment stewardship process, also one of the most visible given they take place at high-profile annual general meetings. They can also prove labour-intensive and challenging to monitor.

The number of proposals filed in the US has increased since the Securities and Exchange Commission put forward guidance in 2022 that make it harder for companies to exclude shareholder proposals from their proxy statements. Russell 3000 companies received 983 proposals in the 2024 proxy season, up from 929 in the prior year, according to law firm Cooley.

The proportion of proposals that actually succeed is low, however. Only 4% of US proposals analysed by law firm Gibson Dunn received majority backing last year, while the average level of support for proposals sat at 23%. Last year, asset manager BlackRock criticised “the poor quality of shareholder proposals” in 2023, which it said resulted in lower support.

With weak levels of support for shareholder proposals and asset managers in the US coming under attack for supporting shareholder votes with focus on ESG factors, technology could enable clients to take matters into their own hands.

“Technology’s helping to make the voting opportunity more available and transparent,” says Georgia Stewart, Co-founder and Chief Executive Officer of Tumelo, which provides infrastructure for pass-through voting, helping asset managers allow their clients to vote.

“If [clients] have a strong view on climate, and they believe that their fund manager doesn’t have the same view, or doesn’t have a strong view, then it might make sense for them to use that voting power themselves,” she continues.

At a more straightforward level, technology has helped to automate the voting process. More votes can now be executed purely electronically, says BNPP AM’s Hershkovich. “Ten years ago we were sending a lot of votes by paper. We had to do fax, we had to do printing… it’s still the case for some exceptions but now the vote is more streamlined.”

New platforms could also encourage changes in voting behaviours. “A growing number of investors have realised the effectiveness of pre-declaring their voting intentions,” says Eleanor Willi, Co-founder and Chief Executive Officer of resonanz. “This provides an important signal to investee companies and provides other investors with a novel view of critical issues from the investor perspective.”

Many major investors from asset managers to large pension funds and even sovereign wealth funds currently pre-disclose their voting intentions, Willi continues. In February, resonanz is rolling out a pre-disclosures feed via its app, which for the coming AGM season will also offer a vote monitoring feature and help investors benchmark their proxy voting records against more than 140 peers.

More engagement detail

 With shareholders often struggling to make themselves heard via the ballot box at AGMs, investors are keen to hold companies’ feet to the fire via a wider range of engagement activity.

“Clients have been requesting more information regarding our activities,” says BNPP AM’s Hershkovich. His firm built its own platform four to five years ago, which supports several functions including engagement and ESG research.

A database needs to be able to record engagements and objectives, helping a manager with its reporting, he says.

“It’s become not just about logging your engagements,” says Impactive’s Callan, who observes that “the stewardship ecosystem has become quite complex”. As well as bilateral dialogue, both asset owners and managers a working with a wide range of partners on disparate themes and programmes, which might last several years, and overlap with other initiatives.

This can cause problems across the value chain. On the one hand, investee companies often face duplicated requests for information and engagement from multiple investors, she notes, which can cause friction, which Callan believes technology can help to avert.

On the other, managers struggle to record stewardship activity efficiently, across multiple reporting obligations to clients. Without the right technology, “the reporting exercise becomes very burdensome, because then you are having to manually reconcile all of your activities and join things up, and then write up your case studies,” she continues.

Size likely plays a role in whether an asset manager builds its own technologies or goes for an external provider, Callan believes. Larger asset managers with significant IT resourcing, along with more complex reporting requirements owing to their sheer number of clients, “want to keep things in-house,” she says.

“When you don’t have a strong IT resource, it just doesn’t make sense to become a software company,” she continues. “I have seen in certain situations that a lot of money goes into developing in-house solutions which take a long time, a lot of money, a lot of resource, and then they just don’t end up hitting the right mark”.

AI assists analysis

There are still gaps in the stewardship technology market as managers seek to keep pace with evolving demand.

“I’ve not seen for the moment really an offer that allows users to do customised queries to link ESG dimensions to voting decisions,” Hershkovich says, a situation which leaves asset managers to carry out this work in house. BNPP AM uses its own data as well as data bought from ESG providers to do this. He observes an increase in the number of start-ups looking to offer engagement platforms, adding that there are “probably too many companies compared to the market”.

However, many expect AI to play a major role in stewardship, filling these and other increasingly urgent needs.

“AI really does expand the scale at which you can analyse documents and reporting, and get a better insight on what’s going on at a company or what’s happening with shareholder proposals,” says Lindsey Stewart, Director of Stewardship Research and Policy for Morningstar Sustainalytics.

AI is being used in a number of ways in stewardship, according to a briefing note by Maanch, a software provider with a focus on ESG and sustainability data for institutional investors and asset managers.

AI algorithms can be used to identify trends within vast amounts of data, while AI-powered risk models can pick out potential ESG risks. AI can also be used to automate engagement, using chatbots and virtual assistants, which “will enable investment teams to engage more effectively on a wider range of issues and minimise administrative inefficiencies”, the company says.

Resonanz’s Willi says that her company is using AI to bring together voting disclosures, owing to the lack of a global standard for how these disclosures should be expressed. “We’re using AI, natural language processing techniques and semantic matching to essentially pull those data points together on a comparable basis.”

AI is already being put into practice by investors, such as the £30.8 billion Brunel Pension Partnership, one of eight UK-based Local Government Pension Scheme pools, which according to its 2024 ‘Responsible Investment and Stewardship Outcomes Report’ used an AI-driven tool to analyse and compare the voting guidelines of around 20 asset managers and owners.

“This tool has been particularly useful for identifying trends and noting year-on-year changes in these guidelines,” Brunel says in its report. “The insights gained from this analysis were instrumental in updating our own voting guidelines, and ensuring they are ahead of current practices and expectations.”

AI has already been used to achieve real-world engagement-related outcomes for investors. In 2023, investors used language models under Spring, an engagement initiative launched by UN-backed Principles for Responsible Investment, to help build a list of 40 companies that have influence over deforestation, which investors can use to carry out targeted engagement.

The human touch

For now, however, old habits are still dying hard in stewardship.

“I am seeing that still in this day and age, spreadsheets are dominating,” says Impactive’s Callan. “Also, there is this concern that you end up taking on a solution that not all people within an organisation will use, because of the desire to not change the way things are.”

Esgaia’s Nilsson believes that “human interaction and intervention will continue to play a central role in investment stewardship”, albeit increasingly supported by innovation.

“Technology will continue to improve both bilateral and multilateral dialogues,” he continues, as well as “facilitate low-cost and increased speed of information sharing, increase transparency and collaboration, leading to better outcomes for clients and society at large”.

The post How Technology is Transforming Stewardship appeared first on ESG Investor.

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