Chapter 6: Stewardship and Engagement Flashcards
What is stewardship? How is it exercised?
“Active, responsible ownership of companies or other assets on behalf of a long-term owner”
- Approach investors take as active owners and to put fiduciary duty into effect
- Process of intervention to make sure that the value of the asset is enhanced over time
- Exercised via voting and engagement
What is engagement? Why is it beneficial and to whom?
- Way in which investors put into effect their stewardship responsibilities
- PRI Principle 2 - Active Owners and incorporate ESG into our ownership policies and practoces
- Stewardship and engagement are beneficial because they enhance shareholder value and support investors in the execution of their fiduciary duty
Which are the engagement dynamics that create value over time?
‘CLP’
- Communicative dynamics (exchange of information)
- Learning dynamics (enhancing knowledge)
- Political dynamics (building relationships)
What are the effects of engagement?
- Successful engagement activity was followed by positive financial returns
- ESG engagement leads to reduction in DOWNSIDE RISKS and the effect is stronger the more successful engagement is
- Effect is strongest on governance
- But engagement less successful on remuneration
How can engagement inform investment decisions?
- Understand business adaptability
What are the characteristics of effective engagement?
- Set in context of long-term ownership with focus on long-term value preservation and creation
- Based on good understanding of nature of company and business model drivers
- Recognized change as a process that takes time
- Employs consistent, direct and honest messages and dialogue
- Is appropriately resourced
- Uses resources efficiently
- Involves reflections and lesson learning
What are monitoring dialogues?
“Dialogue for investment purposes… to understand the company, stakeholders and performance”
- Conversations between investors and management
○ Investment purpose to understand the company, its stakeholders and performance - Informs incremental buy/sell/hold decisions
What are engagement dialogues?
“Purposeful dialogue with specific and targeted objective to achieve change.. individual or collective”
- Engagement dialogue conversation between investors and all level of investee
○ Purpose dialogue with a specific objective to achieve change
○ Two-way dialogue - Individual or collective
What is the purpose of the UK Financial Reporting Council Stewardship code, what does it say, and what are important addition?
- Clarifies distinction between roles of asset owners and asset managers
- Role of asset owner is overseeing, challenging and assessing stewardship activities of asset managers
- Revision of the code in 2020 includes twelve principles
○ Principles 1-8 address the foundations of stewardship
○ Principle 4 charges signatories with identifying and responding to marked-wide systemic risks
○ Principles 7-8 integrate ESG in investment process
○ Principles 9-12 focus on the practice of engagement and voting responsibilities
— New area is focused on OUTCOMES
Principle FOUR (4) is viewed as most challenging as it charges signatories with identifying and responding to market-wide and systemic risks
When was the Walker Report draft and what is its primary message?
- After the financial crises
- Called for stewardship code
What are commonalities in stewardship codes?
- Regular monitoring of investee companies
- Active engagement including escalation
- Thoughtful and intelligent voting
- Some regulatory codes also required investors to manage their conflict of interest - but less common in codes by investor groups
- Escalation should include willingness to act collectively
- Usually focus on public equity investment
- Shareholder rights directive II - likely lead to more stewardship codes in EU
What are differences in between E+S and G Engagement?
- E+S Engagement arise from business activity, sector etc -
○ Engagement often focuses on sector as a whole
and establish shared standards and best
practice
○ Dialogue starts with investor relations and then
escalated upwards - G is determined by business country’s laws and
regulations
○ Focus more on individual companies
- Start with the Chair
What is the difference between active and passive investment and the role of engagement in it?
○ Active investment ->Bottom-up, company focused -> active investment
§ Start with company
§ TAILORED engagement approach cutting across
range of issues
§ Start with underperformers
○ Passive investment -> Top-down, issue-focused
§ Start with screening / Start with AN ISSUE
§ Seek to engage with all companies impact by
issue
- Starts with letter written to all impacted
companies, then dialogue
What operational challenges for engagement need to be addressed?
- Define the scope of the engagement and priorities of engagement
- Frame the engagement topic (climate etc.) into broader discussion around strategy and long-term financial performance
- Develop a clear process that articulates realistic goals and milestones
- The engagement process needs to be adapted to the local context
- Clear escalation measure in case engagement fails
What are the two priorities engagement has to consider?
○ Identifying which company in a portfolio is most in need of engagement
- Determining which engagement issue should be prioritized
Who should investors talk to related to E+ S issues?
Often the IR team, escalation to the board
Who should investors talk to related to business and strategy issues?
- CEO and senior management
Who should investors talk to related to governance issues?
- The Chair
