Lack of Resources Weakens Stewardship Efforts
Panellists at ESG Investor’s 2024 summit highlighted resourcing gaps in stewardship teams and recommended sharing engagement responsibility.
Stewardship across the global investment industry continues to be under-resourced, sparking calls for upskilling and collaborative action in the sector to bridge the gap.
“The simple fact of the matter is that nobody is resourcing stewardship effectively — nobody is close to it,” said Paul Lee, Head of Stewardship and Sustainable Investment Strategy at investment consultancy Redington, speaking at ESG Investor’s 2024 Stewardship Summit.
In particular, asset managers are not evidencing their stewardship claims effectively for asset owners, Lee argued.
“The biggest gap that we typically find in our research is between rhetoric and reality [on stewardship],” he added. “There isn’t enough delivery or evidencing of the assertions that are being made.”
Redington’s 2023 survey found that stewardship and engagement were generally less resourced than ESG and sustainable investment, attributing this phenomenon to the fact that some asset managers regard the former as a “subset” of their sustainable investment teams.
Among the managers included in the survey, 45% reported a zero headcount for stewardship and engagement. Over two-thirds of the 45% are firms with more than 50 members of staff and one-third more than 250.
Scaling down
The report further noted that asset managers with stewardship teams were less likely to invest in their expansion, with just 34% of managers having added to their stewardship and engagement divisions in 2023, compared to almost 80% the year before.
“This is a significant hiring slowdown, perhaps indicating that stewardship and engagement is an area that managers are willing to cut as they face more challenging times financially,” the report mentioned.
As part of its ongoing work, Redington also assesses asset managers’ reporting efforts annually against the UK Stewardship Code.
As such, last year’s report analysed the code disclosures of 44 asset managers, noting “huge variability” in the number of engagement actions reported. While one asset manager reported 5,312 engagement actions over a 12-month period, five others recorded 200 or fewer over the same period.
The report further highlighted inconsistencies in how asset managers defined engagement activity, and an uneven distribution of engagement efforts across geographies.
“Again, the story is unfortunately disappointing,” said Lee. “One of the most striking parts of this research is that there are several case studies that don’t appear to actually include any engagement at all.”
Against this background, there have been ongoing efforts to plug the stewardship resourcing gap. In 2022, the UN-convened Principles for Responsible Investment (PRI) announced a project to investigate stewardship resourcing levels and improve outcomes.
Last year, the group announced the appointment of a stewardship resourcing technical working group, tasked with evaluating and reviewing existing and future resourcing practices. Members included CCLA Investment Management, Credit Suisse and HSBC Bank Pensions Trust.
Working together
Other panellists at the Stewardship Summit recommended that asset managers share some engagement responsibilities across their wider investment teams to better incorporate stewardship into the day-to-day running of their activity.
“One of the really important aspects at play here is the relationship between engagement and [investment management],” said Leon Kamhi, Head of Responsibility and stewardship service EOS at Federated Hermes. “The biggest way that investment managers can and should be leveraging the resources they already have to actually deliver change is to ensure that their individual portfolio managers and analysts are delivering the benchmark.”
This, for example, would mean encouraging investment teams to have conversations with portfolio companies on their performance across priority themes.
“That’s hard work, because it involves scaling up a bunch of individuals who already think quite highly of themselves but don’t necessarily have the skillset to do this sort of [engagement] work,” Kamhi continued. “If asset managers can unlock that, all of a sudden they will have a massive increase in resource and have the ability to deliver a great deal more.”
However, the resourcing issue doesn’t just concern the number of people in a stewardship team or the number of portfolio companies a firm owns, suggested Sofia Condes, Head of Investor Outreach at the FAIRR Initiative.
“It’s also about the number of very complex issues stewardship teams have to deal with,” she added. “How do these teams gain relevant expertise to handle these issues? It’s almost impossible for one firm to have expertise on all areas.”
As such, many investors prefer to focus their stewardship efforts on fewer areas and solidify those. “I think it’s better to do a few things well, rather than trying to do everything at once,” Condes continued.
Several panellists also agreed that collaborative stewardship plays a pivotal role in ensuring that investors can have a bigger, more widespread impact. Initiatives to pool resources in the face of systemic risks have multiplied in recent years. Examples of those include investor-led engagement initiatives such Climate Action 100+ (CA100+) and Nature Action 100 (NA100), which give asset owners the opportunity to join forces and drive positive climate and environmental outcomes at some of the worst-performing companies.
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