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When ESG engagement with investee companies stalls…

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Scepticism around environmental, social and governance (ESG) investing has been on the rise globally in recent months, fuelled by several high-profile incidents of greenwashing, with criticism extended to include ESG stewardship or investee company engagement. Local critics of stewardship have accused asset managers who engage in this practice of creating the pretence of good practice without any evidence of the actual effectiveness of stewardship.

Indeed, these accusations raise some valid points, particularly regarding the question of how asset managers can escalate their approach when stewardship progress stalls.

While it takes time for stewardship to deliver tangible outcomes, believes that asset managers should not hesitate to escalate their stewardship efforts if an investee firm makes poor progress toward predetermined environmental and social goals.

In my view, the first point of escalation is when the leadership of the investee company shows a limited appetite to engage with us on our stewardship initiatives; this is a huge red flag and requires immediate escalation. Simply put, without the leadership’s buy-in, effective stewardship cannot take place.

Successful stewardship requires a set of clearly articulated objectives and targets, that are ‘ambitious yet pragmatic’, followed by an unwavering commitment by the investee firm to these objectives. By setting targets for the leadership of the investee firm, asset managers signal the beginning of an effective and assertive approach to the stewardship process.

The most critical step for effective stewardship is leadership’s buy-in, which is evidenced by the leadership’s willingness to collaborate with the asset management players on areas of stewardship and determining milestone points. This should be followed up by regular engagements to drive progress, as well as utilisation of other stewarding methods such as voting at shareholder meetings and filing shareholder resolutions or proposals.

Unfortunately, it is common for leadership teams to renege on the sustainability commitments they make. Petrochemical giant Sasol provides a fitting example of a company that has had less than rosy results in respect of its sustainability commitments.

Asset managers’ most publicised stewardship engagements with the company came about when the JSE-listed firm opted not to play open cards about its environmental policies, specifically relating to greenhouse gas emissions, disclosures around climate risk and the group’s decarbonisation strategy.

This led to us proposing a shareholder resolution at their AGM in 2019. From this point there has been a step change in the company’s commitment to address climate risk and be transparent with shareholders.

Despite key challenges that still need to be faced, which we are engaged with via CA100+, the company has been more forthcoming in terms of its climate commitments.

Therefore, lack of disclosure is a significant red flag for immediate stewardship escalation, but Sasol is an excellent example of how collaborative, public engagement can be used to escalate stewardship efforts in this regard and drive progress.

Where progress challenges persist, stewardship agents, such as asset managers, have further effective tools at their disposal, to escalate their stewardship efforts.

  1. Collaborative engagement

Collaborative engagement – whereby investors collaborate to drive a certain outcome from investee companies – is a critical stewardship escalation tactic, and it must be driven by the asset management industry, almost forcing the hand of the investee company to come to the party.

In addition to industry collaboration, a further step in the escalation can involve systemic engagement, whereby relevant policymakers are brought into the process.

Effective collaboration comes in several guises, depending on the context, and may include private conversations with the investee firm; discussions at an industry body level; and/or public engagement or statements.

  1. Litigation

While adversarial in nature, litigation is also an option in the stewardship escalation toolkit, and there are several examples of how it has been appropriately applied to escalate stewardship efforts.

Investee companies may also occasionally use litigation as an opportunistic tactic to prevent asset managers from driving stewardship.

In the same breath investors can use litigation to force progress in the stewardship process.

  1. Divesting

 The ultimate escalation tactic is to divest, but divestment introduces further challenges by paving the way for the investee firm to do far greater damage, with impunity.

We can be a thorn in the side of a company if we are a shareholder holding up director appointments, but we lose that voice, and the ability to slow or limit destructive behaviour if we cease to be a shareholder.

Divestment must be an absolute last resort, used only when every other tactic has failed, and the stewardship agent is 100% certain that further engagement would not produce even marginally positive results.

Active stewardship, enhanced where necessary using escalation strategies, is an indispensable tool for asset managers to achieve real-world impact at investee firms.

When we engage a company on disclosure of its emissions, for example, we do so with a push to adopt the Task Force on Climate-related Financial Disclosures (TCFD) framework as a starting point. In so doing, the company develops an in-depth appreciation of climate-related risks and opportunities.

This approach delivers wins for both the asset manager and the investee firm.

Asset managers can influence meaningful real-world change and advance on various environmental, social, and governance (ESG) measures, while the investee firm integrates the E and S of ESG into its business strategy and contribute to a range of positive impacts under the resilience and sustainability headings.

The practice of stewardship is a never-ending process. As long as a company remains a collection of people making decisions, it will be subject to imperfection and there will always be something on which to engage. But stewardship can and does drive change, and when progress is not being made, we do have tools at our disposal to rectify this.

Nicole Martens is senior stewardship professional at Old Mutual Investment Group.

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