Invest for Good: Point of No Returns - ShareAction

Peter Uhlenbruch, the Head of Investor Standards at ShareAction, discusses their research into the standards for responsible investing among global asset managers and where the shortfalls are.

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ShareAction is a responsible investment non-profit organisation with a vision for a global investment system where all investors not only consider financial returns, but also the real world impact of those investments on both people and the planet. Investors have a key role and responsibility to make sure that we not only reach a Paris aligned pathway, but do everything we can to meet the Sustainable Development Goals and help avert the biodiversity crisis. What we wanted to do was build a standard for responsible investing that’s fit for the challenges of the 21st century.

The research project
The 75 asset managers that were invited to participate in the study control more money than the combined GDPs of the US, China and the European Union. We wanted a truly global perspective with participants evenly spread across the Americas, Europe and Asia Pacific. We developed a very comprehensive questionnaire to identify their approach across four key themes. The first theme was RI governance, which explored accountability, the quality of sustainability training for investment staff, financial incentives and how they’re aligned with sustainability objectives, stewardship and voting. The other themes were human rights, biodiversity and climate, which are all systemic issues. The Covid pandemic has really put ESG back in the spotlight. There’s a lot more focus on what investors are doing to ensure human rights are respected in the companies they invest in and throughout the supply chains. We looked at the quality of policies, their underlying commitments, the quality of stewardship, risk management and what data and metrics are being used.

92% of the asset managers invited to participate disclosed directly to our TCFD-aligned (Task-force on Climate-related Financial Disclosure) questionnaire or reviewed the survey response. There was a willingness from the industry to engage, understand where they stood and how to make progress.

Performance of the asset managers
Performance was not determined by size, region, asset class focus (fixed income vs equity) or investment strategy (passive vs active). The majority of asset managers are still very early on their journey and the sector has a way to go. The 25 asset managers who did well came in all shapes and sizes, which illustrated that leadership is possible for all kinds of asset managers.

Follow-up engagement
We want to work closely with the industry, give them decision-useful feedback and support them to improve their underlying practices, so we sent detailed performance feedback and recommendations to all 75 participants. We also had more than 50 follow-up calls with senior level staff, where we identified gaps and opportunities for improvement.

In March 2021, ShareAction will publish a leading practice guide for asset managers on responsible investment. The aim is to support the industry to drive better standards. We looked at the best performers in the survey and feature over 50 short case studies across themes covered in the global ranking and highlight the significant progress that parts of the sector made in 2020.

The next steps for the sector

RI Governance
ESG accountability should sit at senior executive and board level. The mindset of an investor today is very different from the mindset needed 20 years ago. We have systemic crises that demand investors to think seriously about climate risk, physical and transitional risks, to look ahead in terms of decades, but take action now. The biodiversity crisis demands a certain level of knowledge and expertise to take appropriate action as does human rights. The training on ESG topics (particularly systemic ones) for all investment staff needs to improve. Training should bring in external expertise, be mandatory for investment staff and include board members.

Incentives are key, so the sooner asset managers start aligning remuneration structures with sustainability objectives the better. Asset managers should be encouraged to publish TCFD reports even if they are early on in their journey. Asset managers with shareholders have a legal responsibility to disclose any financially material ESG risks. The process of publishing a TCFD report can drive organisational change and progress on managing climate risk.

ESG-related voting
Voting is a cornerstone of stewardship and is one of the most powerful and next-step actions that asset managers should take to signal to the companies they are invested in that they want to see successful low carbon or sustainability transition. Voting policies should contain clear voting positions on systemic ESG topics and translate into voting action. This includes increasing support for ESG shareholder resolutions and voting against directors pay when ESG is not taken seriously. There should be a firm-wide ‘house view’ on ESG resolutions that matter, with transparency given on all votes and rationales for key ESG resolutions. BlackRock now systematically votes against companies that don’t provide TCFD disclosure and publishes detailed rationales on key ESG resolutions.

ESG Stewardship
Several progressive global asset managers are setting clear and ambitious company expectations on systemic ESG issues. They are developing a clear and ambitious step-based escalation strategy with clear consequences for inaction. Engagement should lead to real-world change.

Systemic ESG Issues: Climate/ Human Rights / Biodiversity
We’d like to see asset managers develop firm-wide policies that outline their approaches to investment decision-making, risk management, stewardship, voting and stakeholder engagement.

Climate change: We’ve seen the most traction here with clear positions on fossil fuels (divestment or forceful engagement) and commitments to net-zero across portfolios. Asset managers should be engaging on key topics and sectors.

Human rights: Policies that for example, exclude controversial weapons and provide clear positions if investments breach international norms (divestment or forceful engagement).

Biodiversity: We think this will be the hottest ESG topic in 2021. There is an enormous amount of finance at risk, not to mention life on earth itself and is as big a risk as climate change.