New Era: Our asset manager engagement is lifting stewardship ambitions and long-term value creation

As 2024 draws to a close, it becomes a time for reflection on the year’s developments and predictions for the coming year. So, within PA Future‘s end-of-year series New Era, members of the sustainable investment community will be doing just that, as well as sharing some eco-friendly Christmas hacks and the one thing they want to see under the tree this year to accelerate the transition.

Here, Louisiana Salge, head of sustainability at EQ Investors, shares best practice at asset managers on biodiversity engagement, more pronounced climate change and how SDR has already improved some funds.

What was the most sustainable investment initiative your team undertook in 2024? 

Stewardship has been a big priority for my team this year and it’s where we ‘ve had the greatest impact. It is not new that EQ pushes fund managers on evolving best practices, we are well known for holding them to account. However, we have made a leap in communicating this activity to clients and stakeholders this year and clarifying our investor contribution to sustainable change.  

Over the last twelve months we completed the EQ Sustainable Stewardship plan for 2024, which details EQ’s engagement priority topics and the five levers we have to achieve progress. We are proud to push for change across the entire value chain.  

For example, in our biodiversity risk pillar we incorporated feedback from clients concerned about deforestation risk, engaging on and recording progress against “best practice” KPIs for all 11 fund managers with biodiversity-risk company holdings. We also joined UN PRI’s Spring collaborative engagement program to engage directly with two companies, and we attended company AGMs to engage on nature and certified sourcing targets.  

I am particularly proud about the transparent way we have communicated EQ’s investor contribution, showing milestone progress year-on-year. 

Were there any unexpected challenges or triumphs in your sustainability journey this year? 

We know from ShareAction’s helpful Voting Matters reports over the last few years that asset manager voting records vary significantly when it comes to social and environmental shareholder resolutions. We have undertaken in-house research compiling over 25 asset manager voting records against over 600 selected social and environmental resolutions between 23-24. Talking to peers and fund managers, this “triumph” research project resulted in a pretty unique dataset, which will now be used by our EQ team to better monitor and engage on our asset manager partners’ voting behaviours, lifting stewardship ambitions to better align to long-term value creation. 

SDR has been rolled out to the UK funds market. How has this adopted within your business? Has this been a positive development? 

Given that EQ is a sustainable specialist DFM, we have worked on SDR since the very first discussion paper back in 2021 and have fed back directly to the FCA in every feedback cycle. We are welcoming of the FCA introducing rules and frameworks to help reduce greenwashing and provide better transparency into the UK sustainable investment market.  

We have embraced the labels into our fund research and engagement process already and are preparing for portfolio management to come in-scope next year. Some key components of SDR have always been part of our service. These include clear portfolio aims, different sustainable investing strategies, transparent sustainability reporting and stewardship. However, even still, we are undertaking some necessary operational changes to be best placed to deliver SDR solutions to our clients and the wider UK IFA market going forward.  

What do you predict will be the biggest trend in sustainable investment in 2025? Are there any emerging sectors or trends you are particularly excited about? 

We know that climate change is getting more pronounced, with many natural disasters from extreme weather affecting communities and businesses today. We have already started engaging with managers on protecting investments against physical climate risk impacts, but it is clear that tools/methods are significantly underdeveloped compared to transition risk. Some leaders are bringing scientific climate modelling, geospatial analysis and supply-chain mapping together – our role is to encourage best practices across the industry.  

Given that we are increasingly unlikely going to meet the 1.5-degree scenario, sustainable investors cannot lose sight of adaptation solution investments and those forward-thinking companies which are working on mitigating their exposure to physical risk. I expect these trends to all feature going forward. 

How do you think global events or economic shifts might influence sustainable investing next year? 

Trump’s election in the US is the most obvious event. While we may see lower headline support for climate policy from the US, there are areas of the environmental theme that show promise despite a changing of guard at the White House.  

As professional sustainable investors we need to work within the investable universe to find opportunities for impact and returns. For example, there has been a growing trend in the US for more (renewable) electricity: coming both from the broader trend of electrification as well as the emergence of artificial intelligence and power-hungry data centres. Following years of negligible growth in electricity supply, now those companies involved in meeting this rising demand with energy efficiency solutions will continue to benefit from the structural growth trend, which is unlikely to be altered no matter the politics.  Diversification is still key for us to manage our portfolios through uncertain macro events ahead, given no one has a crystal ball. 

What are the top challenges sustainable investment teams will face in 2025, and how will you tackle them? 

To mainstream sustainable investing, strategies need to offer competitive returns, when compared to traditional portfolios. While the long-term investment case for sustainable companies and assets is often clear, reducing risk and presenting more exciting growth trajectories, the journey to get to the same endpoint needs to be considered. Short-term performance divergence can be difficult for advisers and retail clients. Greater focus on managing portfolios with reduced tracking error is key to this, while keeping the great sustainability goals and outcomes that clients so desire.  

If you could set one new industry standard or regulation in 2025, what would it be? 

The repercussions of the new FCA anti-greenwashing rule and naming & marketing restrictions have already gone some way in reducing the chance of a low-ambition portfolio being classed as suitable to clients with strong sustainability preferences. We have seen a few propositions re-name on the back of it, dropping previous sustainability claims.  

We now need to work on better cross-regulatory alignment. Much of the sustainable fund universe innovation has come from Europe in recent years, and while we support the growth of the UK market it would be unwise to limit our portfolios to that to achieve best client outcomes. I would love to see more rapid roll-out of cross-cutting rules or translation guidance between the EU and UK, helping to create greater clarity for advisers and underlying clients.  

What’s the most eco-friendly Christmas hack you’ll be trying this year? 

Most of us don’t need more stuff, so I am a big fan of gifting experiences. If you do want to gift something special, why don’t you support B-Corps or social enterprises with your purchase. 

What’s the one thing you’d love to see under the tree to help accelerate sustainability in 2025? 

We need more climate target and action alignment globally. COP seems to present little tangible progress year-on-year and countries are worried about being first-movers on the transition. The only way to get out of this is to move together at the pace we need. It’s a pretty big ask for Christmas but hopefully not that selfish!