Chapter 6: Stewardship and Engagement Flashcards
What is stewardship? How is it exercised?
- 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?
- Communicative dynamics (exchange of information)
- Learning dynamics (enhancing knowledge)
- Political dynamics (building relationships
What are the effects of engagenment?
- 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 in strongest on governance
- But engagement less successful on renumeration
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?
- 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?
- 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 outcomes
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
- Thoughtfully intelligent voting
- Some regulatory codes also required invesors 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
§ 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 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 investers talk to related to E+ S issues?
Often the IR team, escalation to the board
Who should investers talk to related to business and strategy issues?
- CEO and senior management
Who should investers talk to related to governance issues?
- the Chair
Who should investers talk to related to voting issues?
- company secretary or the IR
When might escalation not be the right step?
- Escalation might not be the right step if no progress has been made and the objective doesn’t warrant excessive activity
What are common forms of escalation?
○ Holding addition meetings with management
○ Expressing concerns through company advisors
○ Meeting with Chair or other board members
○ Intervening jointly with other institutions
○ Making a public statement
○ Submitting resolution to speak at general meeting
○ Requesting a general meeting - and sometimes
change in board membership
○ Writing a formal letter
○ Seeking dialogue with other stakeholders
○ Legal remedies or arbitration
- Adding company to exclusion list
What are key features and rules of collective engagement?
- Trusted facilitator, not an advisor
- Opt in/Opt out
- Complementary to member’s engagement
- Confidentiality
- Nominated key engagement contact
- Hub and spoke model
- No inside information
- Non-concert party and no-group
- Heightened procedure
- Conflict of interest avoidance
Please describe the purpose of voting, when investors should vote?
- Referred to as proxy voting because investors rarely physically attend AGM
- Vote is a key tool for the active investor
- Voting decision should align with the investment purpose and stewardship agena
- The vote itself is rarely meaningful in itself because there may be a range of reasons that an investor might have
- Therefore, investors have a active program to communicate to company
- Informal insights and benefits of actually participating in the meeting are of much value
- Investors should vote not just on resolutions where they have a clear opinion
- If investors are concerned about financial viability - they should vote on dividend issues
According to PRI, what can asset managers engage on infrastructure projects?
- Use ESG assessment for due diligence process before acquisition
- Include ESG risk and opportunities identified during due diligence into post-acquisition process plan and into asset management activities
- Engage with, and encourage, management to act on ESG risks
- Define and communicate ESG expectation for operations and maintenance
- Ensure that ESG issues are integrated into asset level policies
- Advocate for governance framework that articulates ESG responsibilities
- Set performance targets , including reports to board and investors
- Make ESG information and expertise available to asset or project company
