The Spirit of Partnership
Vaishnavi Ravishankar, Head of Stewardship at Brunel Pension Partnership, sees greater scope for asset owner and manager collaboration, despite recent turbulence.
The relationship between asset owners and managers is the central dynamic through which sustainability concerns and priorities are communicated to issuers of stocks and bonds.
As long-term investors with responsibilities to beneficiaries stretching out over decades, asset owners prefer to engage with companies to express their views on ESG risks and opportunities – rather than haranguing them in public or threatening to walk away.
But coordination between asset owners and managers on sustainability-related stewardship has come under increasing scrutiny in recent years. As evidence of the financial implications of climate change become more apparent, and other systemic risks gain prominence, fractures have begun to show.
Examples include the weakening support from asset managers for ESG-related resolutions in recent proxy voting seasons, and the withdrawal of large US asset managers from Climate Action 100+ and the Net Zero Asset Managers initiative.
Asset owners have been characterised as laying down the law to bring their managers into line. This week, the Financial Times said New York City’s public pension funds had “put asset managers on notice” over their climate plans.
A similar tone was taken earlier this year when an international group of asset owners backed new guidelines on climate stewardship, which set out their expectations for asset managers by way of five principles. A sense of strained relationships was underlined a few weeks later when one of the co-authors of the guidelines – The People’s Pension – announced it was pulling £28 billion (US$37.37 billion) from State Street Global Advisors, in part for stewardship-related reasons.
Vaishnavi Ravishankar, Head of Stewardship at Brunel Pension Partnership, and one of the other co-authors of the climate stewardship principles, doesn’t see things in quite such a confrontational manner.
“The principles were created in the spirit of partnership. We look at our managers as partners that are implementing our investment objectives,” she told ESG Investor.
Industry leadership
Brunel is one of eight local government pension scheme (LGPS) pools serving public sector pension clients in the UK. According to its 2024 review, the pool manages £35.9 billion and cut its exposure to greenhouse gas emissions by 57% last year from a 2019 baseline. Alongside climate change, other key responsible investment priority themes include biodiversity and nature, and human rights and social issues.
Brunel has also demonstrated industry leadership on aligning investment with climate goals in other ways, including Chief Responsible Investment Officer Faith Ward’s role as Chair of the Institutional Investors Group on Climate Change and the UK Transition Finance Council’s scaling transition finance working group.
According to Ravishankar, the climate stewardship statement and guidelines she co-created partly reflected Brunel’s existing partnership-based approach to working with asset managers.
“The project came about because of direct feedback from asset managers, who were getting conflicting views from multiple clients, which was creating tension in the market. They were really keen for asset owners to articulate their views on how asset managers should progress on climate stewardship,” she said.
The five principles represent core pillars on which the signatory asset owners believe managers’ climate stewardship efforts should be based, covering policy engagement, collaboration, theory of change, resourcing, and a systematic approach to voting.
“Our managers are at different points on the spectrum when it comes to responsible investment and stewardship. The statement is principles-driven to give them sufficient flexibility in terms of implementation. But there is a clear direction of travel,” said Ravishankar.
The principles represent a starting point, she added, rather than an ultimatum.
“Not all asset managers can fulfil all principles. But by triggering conversations about gaps, the principles provide an opportunity for asset owners to ask more tailored questions of asset managers. It’s also totally up to the asset owner how they integrate the principles into their selection or monitoring processes.”
Nevertheless, managers will be challenged, she insisted, particularly where there are material divergences – for example, where their stewardship approach is not in line with the long-term interests of asset owner beneficiaries.
Dynamic situation
The timing of the release of the climate stewardship principles is illuminating. They were issued just before the closing of the Financial Reporting Council’s consultation on revisions to the UK Stewardship Code, which defines expectations for signatory asset owners and managers.
The exercise has proved controversial due to proposed changes to the definition of stewardship which have been perceived by some as weakening its role in achieving positive environmental and social outcomes. The final revisions to the code are expected to be released in the first half of the year.
“Articulation of asset owner expectations would be useful at any time, but it’s particularly pertinent given the dynamic situation around the Stewardship Code – and everything else that is happening in the world. It gives support to those managers who want to be climate progressive and may be facing headwinds,” said Ravishankar.
The principles also coincided with the announcement of two rule changes by the Securities and Exchange Commission (SEC) which meant that US-based managers would face more headwinds around stewardship than most. As well as rescinding existing guidance to give issuers more power to reject shareholder proposals, the regulator introduced new rules that forced large shareholders to reassess how they conveyed their views on ESG-related issues.
Even before the SEC’s rule changes, US-based managers were quitting collaborative initiatives aimed at coordinated investor action on climate change, partly due to political pressures.
“We recognise that there are regulatory complications. If asset managers are not able to collaborate in a particular jurisdiction in a certain way, or on a particular topic, then we will ask what else in their toolbox can they use to drive the same objective,” said Ravishankar.
“By asset owners embedding asks around climate stewardship into their selection and monitoring processes, those questions will enable managers to innovate wherever they see challenges. It’s an evolving landscape, and it’s not easy to navigate, but as owners of the mandate we need to make sure we’re holding managers to account and supporting them where appropriate.”
Innovation could stem from the adoption of a wider perspective on collaboration between asset owners and managers in the stewardship space, according to Ravishankar. Under the auspices of Climate Action 100+, asset owners and managers have partnered to engage with the most carbon-intensive firms to accelerate climate-related disclosure and action.
Such formal alliances are just the tip of an iceberg that also includes a wide range of smaller, time-bound and sector-specific engagement collaborations. Ravishankar sees collaboration as playing a key role in company engagement because it provides clarity and consistency on asks to companies.
“But collaboration should not be limited to company engagement. There are a number of avenues for collaboration through industry initiatives, such as information sharing and building frameworks,” she added.
Strike a balance
Much of climate-related stewardship activity by asset owners and managers is conducted behind closed doors, with engagement in practice involving the use of multiple channels to inform and persuade issuers, alongside a widening range of parties.
Inevitably, greater attention is paid to how shareholders vote at AGMs, partly because the activity is in the public domain, but also because it represents an escalation on a matter where consensus has not been reached.
Filing or supporting resolutions at AGMs should not be seen as a confrontational act, according to Ravishankar.
“We don’t see it as antagonistic, but as a legitimate pathway to extend ongoing engagement, as well as a step up in the assertiveness with which we express some of our concerns or dissatisfactions,” she said.
“Resolutions are a very important component of how we exercise our rights as shareholders, and a useful way to communicate our views to the company.”
Sustainability-related resolutions have received less support and more criticism in recent AGM seasons. Ravishankar acknowledges the difficulty in striking a balance between providing clarity for corporate management to act on and what might be considered micromanaging.
“Given the resource-intensive nature of filing shareholder resolutions, we are very keen to use them to drive meaningful impact. When we decide to file or support file a resolution, we think very carefully about how it contributes to preserving as well as enhancing value,” she said.
Brunel has filed a resolution to be voted on during Shell’s AGM next month, which asks the oil and gas firm to explain how plans to expand its liquified natural gas (LNG) operations are consistent with its climate commitments.
The resolution is co-filed by the Merseyside Pension Fund, Greater Manchester Pension Fund, the Australasian Centre for Corporate Responsibility, and responsible investment NGO ShareAction.
As well as querying Shell’s reliance on negative emissions technologies to offset the climate impact of its expanded LNG production, the co-filers are also concerned about value erosion due to uncertainties over future demand.
According to Ravishankar, further information is needed to help investors appraise the risks and opportunities arising from Shell’s strategy, although she points out the firm has made progress on transparency.
Such transparency has not been enough to stop some asset owners divesting from Shell in recent years, including the Church of England Pensions Board and Dutch pension providers PFZW and ABP.
“There are areas where we feel we’re not getting enough information or clarity from Shell. But it’s up to each investor to decide when to escalate, and what is the point at which they reach the end of the journey,” said Ravishankar.
Maximum impact
Just as Brunel hopes its asset management partners will take steps to reinforce their approaches to climate stewardship, the pension provider is not standing still.
“We continue to refine and evolve our own thinking, including our responsible investment strategy. We’ve thought through the relevance of our key themes, clarified our objectives, and our theory of change, to ensure maximum impact through effective use of stewardship levers,” said Ravishankar.
These changes will be communicated through Brunel’s upcoming stewardship report. Any further iterations may be influenced by the outcome of the UK’s pension review, following indications from ministers that the LGPS pool may be forced to merge.
However, it is likely that a broader, systems-led approach to stewardship will be central to future plans.
“We’re not just concerned with specific companies, but about how they interact with each other, the challenges posed by their interdependencies and how that affects our broader portfolio,” explained Ravishankar.
This means recognising public policy engagement is a key lever, particularly when companies are not moving at pace and regulation is an impediment to progress.
“As asset owners, we have an important role to play in creating a policy environment that is enabling the objectives we’ve set for ourselves, like climate change,” she said.
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