“In a world where the word ‘sustainability’ features everywhere, ‘stewardship’ may seem almost old-fashioned. We think it is anything but,” says Anastasia Petraki, Schroders’ head of policy research.

Anastasia Petraki, head of
policy research, Schroders

Here, she debunks five myths of stewardship and explains how it helps hold companies to account. Stewardship is an essential component of managing risk to deliver sustainable, long-term value, adds Petraki. “We view stewardship as an inseparable part of investment and essential to properly implementing sustainability, particularly in a forward looking way.”

Myth 1: Divestment is the only way to affect real change

Divestment of a stake in a company is sometimes seen as the only way to realise corporate change, particularly in issues like climate change.

Indeed, divestment can be a powerful tool for active managers as a potential threat to ensure companies’ responsiveness. It is, however, not a tool that should be used lightly.

An alternative is to manage the existing holdings rather than exiting a position once an issue arises. Stewardship is about relationship building and having regular meetings with the executive management of investee companies – and not about picking up a fight and exiting at the first sign of concern. To escalate concerns, investors may increase the number of meetings with non-executive directors or the chair of the company board. If there is little progress, further discussions may take place with other stakeholders or investors.

Additional steps to consider before divesting include going public with the concerns, submitting shareholder resolutions at general meetings or voting against them. Only when these measures have proven ineffective and real risk for value exists, should divestment become an option.

Myth 2: Voting against company management is the only proof of an engaged investor

“This is not true. We believe that making full use of our voting rights is an essential part of our fiduciary duty. We hold management to account and ensure they are managing the business for the long term. That is why it is our policy to vote on all resolutions at most general meetings globally,” says Petraki.

Voting against or abstaining from voting are ways of escalation. These are indeed results of ineffective engagement, rather than proof of an engaged investor.

In a similar vein, voting in favour of shareholder proposals is another way to vote against management. Company management often reacts to these, agreeing to make the required changes which is why many shareholder resolutions are withdrawn.

Figure: Voting decision for shareholder proposals 

Figure: Voting decision for shareholder proposals

Source: Schroders

Myth 3: Stewardship is run separately from investment

A ’legacy’ misconception is about the integration – or rather lack thereof – between stewardship and investment. This ‘legacy’ is a result of the early days of stewardship teams that in some cases seemed to operate in silos, separate from investment.

“It is important to note, though, having a team that is dedicated to stewardship does not necessarily mean it is separate from the investment process. The main reason for exercising stewardship is that it is part of investment and being invested in a company,” states Petraki.

Petraki adds that Schroders integrates ESG considerations across the investment process, and the stewardship team works together with the investment teams using the insights gained from thematic engagements to inform investment decisions. 

Figure: How Schroders integrates ESG into investment

Firgue: How Schroders integrates ESG into investment

Source: Schroders

Myth 4: Sustainable investment is not about stewardships

Stewardship and sustainability are sometimes viewed as distinct issues with separate agendas.

In practice, however, stewardship is a key component of sustainable investing and an integral way to implement sustainability.

What stewardship and sustainability have in common is that they are both broad and cover a range of activities. ESG integration and active ownership, for example, are components of stewardship.

“Needless to say, sustainability is an important theme in our decision-making process, as we, as a firm, aim to implement sustainability across everything we do by the end of 2020. This is why we take stewardship seriously in practice,” notes Petraki.
 

Sustainable investing can be generally categorised into six forms:

  1. ESG integration seeks to identify and understand financially material ESG factors and incorporate them into the investment process; it is not about excluding anything.
  2. Active ownership is about actively engaging with companies and using voting rights to promote more sustainable business practices.
  3. Best-in-class focuses on sector leading ESG companies, for example identifying and investing in the least carbon-intensive cement producer.
  4. Thematic investing targets a specific theme such as climate change, renewable energy or healthcare innovation.
  5. Negative screening excludes certain controversial investments on ethical, religious or sustainability grounds, for example, weapons, gambling or coal.
  6. Impact investments are typically made in private markets with the primary goal of achieving specific social or environmental benefits that are measurable while also delivering a financial return.

Myth 5: Stewardship is opaque and takes place behind closed doors

The majority of communication with investee companies is private. But this does not mean that it is opaque. Schroders publishes its firm-wide stewardship activities on both a quarterly and annual basis in its Sustainable Investment Reports. These reports are complemented by its monthly publication of its voting activities. “There is more transparency than ever before, not only towards our clients, who usually wish to receive tailored reports, but also publicly,” says Petraki.

Click here to learn more about how to effectively integrate ESG in multi-asset portfolios as well as the proprietary tools that Schroders uses to assess companies from a sustainability perspective.


IMPORTANT INFORMATION

Investment involves risks. This material is issued by Schroder Investment Management (Hong Kong) Limited and has not been reviewed by the SFC.