The Long Game
Approaching his 20th anniversary in responsible investing, Rathbones Stewardship Director Matt Crossman reflects on the evolution of stewardship and highlights the power of collective action.
“Responsible investing can mean so much more than voting, but it can’t ever be less than that,” Matt Crossman, Stewardship Director at Rathbones Group, told ESG Investor as part of a conversation during which he reflected over his career. “The core responsibility of a sustainable investor is to use their rights and influence in the companies they own.”
And as a 20-year veteran in responsible investing, Crossman certainly has borne witness to just how far investor engagement can come.
“Stewardship is far more embedded and widespread as a concept,” he said. “Today, no one would argue that investors shouldn’t be conducting stewardship activities.”
A nascent sector
When Crossman joined Rathbones Greenbank Investments – Rathbones’ in-house boutique for ESG investments – as an ethical researcher in 2004, sustainability data wasn’t readily obtainable.
“Greenbank ran its own screening database and my job was to look after it, for example trawling through news sources, aggregating data, and uncovering granular insights on the UK’s largest companies and a few international firms,” he said. “It gave me a grounding in how companies work and their approach to sustainability.”
At that time, the Greenbank team wrote to FTSE companies every year to encourage voluntary disclosures. Crossman was involved in the letter-writing campaign, but recalled it “became obvious that we had influence back the other way”.
After taking on an engagement manager role in 2006, he became much more aware of Greenbank’s main clients, which were large charities, religious faith groups and celebrities. “Clearly, they wanted financial products more aligned with their values,” he said. “Having the long-term best interest of your underlying beneficiaries at heart is the basis of stewardship.”
The first annual general meeting (AGM) Crossman attended was Shell’s that same year, where Rathbones co-filed a resolution asking the oil and gas giant to do a better job on ESG risk management. “There wasn’t the big institutional buy-in [seen today], so we used the minutiae of UK company law to get Greenbank’s individual investor clients to co-file resolutions,” he said.
The engagement initiative had quite an effect, sparking off a debate in the UK around shareholder voice.
“We realised that not only do we have the financial stuff to think about, but also stewardship influence and voting rights,” Crossman added.
Turning point
The financial crisis in 2008 brought then brought that same debate front and centre.
“It’s one of those touchstone moments because, like most ethical investors at the time, we were overweight in financials,” Crossman recalled. “What happened in the crisis drove a lot of self-reflection on what we needed to do as an emerging industry.”
The 2012 Kay Review of UK equity capital markets and long-term decision-making, in particular, was a pivotal moment for responsible investing. It concluded that one of the contributing factors in the 2008 financial crisis was lack of shareholder engagement, citing RBS’s disastrous acquisition of ABN Amro as an example.
“There was the sense that institutional investors were asleep at the wheel and needed to step up engagement,” said Crossman. Three years earlier, Rathbones had signed up to the Principles for Responsible Investment (PRI), a process that he was involved in. He then began to work with the wider business, beyond the ESG boutique.
“Greenbank helped the main business become aware of this emerging agenda,” he said. “As part of that, we looked at the stewardship area and concluded we should be doing more of it.”
Soon after, Rathbones appointed a proxy voting consultant and set up its own voting policy. In 2015, the group also submitted its first application to the Financial Reporting Council’s (FRC) UK Stewardship Code. “An approved Stewardship Code status is basically a baseline entry to pitch for institutional business around responsible investment,” Crossman explained.
But while he commended the FRC’s involvement in bringing rigour to the Stewardship Code, he also contended that the council should examine the growing reporting burden. When he started out in 2004, transparency was lacking, but he believes that it may now have gone the other way.
“We arguably have too much uncoordinated transparency today, with PRI reporting, Stewardship Code reporting and different benchmarks,” Crossman added. “There is almost an industrial machinery around stewardship reporting.” He believes that one must also ensure that beyond reporting, enough time, energy and assets are being devoted to core engagement with companies and use of voting rights.
Negotiating power
While having clear goals and being held accountable is important in engagement efforts, the human element is equally important, according to Crossman. He argued that every engagement professional should spend as much time on learning how to negotiate as on data and research techniques.
“Negotiation is the art of letting the other person have it your way,” he explained. “If you bang people over the head with stuff, then it is unlikely that they will do what you want. Human nature just doesn’t work like that and neither does engagement. You have to plant the seeds, encourage, and gently chastise.”
While Crossman said he understood why people sometimes get frustrated with engagement, he also highlighted the powerful effects it can have when it works – as seen with Rathbones’ Votes Against Slavery (VAS). “That is a good example of what investors can achieve when they work together,” he added.
The pioneering VAS campaign was launched five years after the passing of the UK Modern Slavery Act 2015, in which section 54 (s54) encouraged every company to produce modern slavery statements. However, the vast majority of companies didn’t obey the law.
The Rathbones team brainstormed about what could be done and, in 2019, worked with the Office of the Independent Anti-Slavery Commissioner to challenge three FTSE 350 companies that had failed to meet the reporting requirements of s54.
“We engaged with these companies, indicating that because this was a legal requirement that they hadn’t met, we were going to consider voting against their annual report and accounts if they didn’t comply,” said Crossman. “We didn’t know if it was going to work, so we tested it out.“
This process enabled Crossman and his team to test out how impactful AGM votes could be.
“Previously, companies would take weeks or months to reply to engagement letters,” he recalled. “Now, they were calling me the next day for a meeting. So we decided to strike while the iron was hot.”
When Rathbones launched VAS in 2020, the first step was to invite PRI signatories to sign engagement letters, which were then sent to 22 target FTSE 350 companies. The campaign attracted 20 asset owners and investment managers globally with a combined £3.2 trillion (US$4 trillion) in assets under management (AUM). The next year, the initiative garnered support from a larger investor group with £7.8 trillion AUM, challenging 61 FTSE 350 companies.
“This was about thinking creatively and looking for the appropriate opportunity for the right companies on the right issue,” said Crossman. “Engaging through voting has a powerful effect,” said Crossman.
Divestment option
Despite the headway being made with engagement, many large asset owners still opt for other solutions. An example was the Church of England Pensions Board’s announcement in June 2023 that it planned to divest from oil and gas companies.
Divestment has been a recurring theme across Crossman’s two-decade career. However, he believes the investment industry is reaching a stage where it could have broader influence on larger companies, because of the numbers involved in investor coalitions.
“The first Shell resolution in 2006 included about 112 individual investors,” he said. “Fast-forward to the resolution we co-filed at the Shell AGM this year, and it’s nearly 4%-5% of company shareholders. We can have a debate about whether that dialogue has been effective enough, but we certainly have leverage and influence.”
Notwithstanding this obvious progress, Crossman acknowledged that divestment had to be the final step in the engagement escalation framework.
“If we sell our shares, this opens the possibility that someone else buys them who isn’t as committed to net zero or modern slavery as a Rathbones would be,” he said. “Listening to the debate, divestment is a values-driven choice for some people and we have to respect that. But ultimately, unless we’re using this voice on behalf of beneficiaries, these companies aren’t going to hear it.”
Crossman also believes that the industry is due a renewal in the governance space. While much more social and environmental expertise has been brought in, he is concerned that the industry has lost some of its expertise in the field.
“An investor needs to be as assured and well-versed in global corporate governance as in any other factor, because governance is the oil that keeps the engine of corporate life running,” he argued. “One of my hopes for the future is that we have a renaissance in the role of ESG corporate governance, and that we don’t slip on its ability to promote the long-term health of companies and the societies they [operate] in.”
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