The Sustainable Investment Ecosystem update #32 week ending 9 July 2022

In the sustainable investment circle, we speak of the ecosystem – the dynamics of regulations; monetary and fiscal policies impact on asset returns; economic cycles and fundamentals that influence sector and stock selection; material factors that drive thematic interests; geopolitics risks in supply chain and market exposure; the emergence of common reporting standards and data architectures; the voices of industry organisations and civil society; and the sustainable value creation capabilities of companies. Making sense of the information we receive every week is a positive challenge. I write this blog to share my highlights of the week and hope you will find it useful.

Investor Focus on Diversity and Race Equity?

Glad to support @Deborah Gilshan who works with @Sophie Chandauka on ways to ensure greater transparency and action to address issues relating to racial inequity in the workplace. Representation matters.

The panel covered a wide ranging discussion, touching on issues such as whether pay gap reporting is driving changes we would like to see, and how to link meaningful goals to executive pay in order to incentivise desirable behaviours to deliver change.?

An important point made by @Ann Cairns, executive vice chair at Mastercard and Global Chair of the 30% Club, was to work with grassroots to get feedback on the ground. They may be organisations or individuals.

This reminds me of a conversation I had with Richard @R A H Nunneley, who also served as Governor of the LSE, on the importance of going beyond ‘the tone from the top’. What is as important is to understand the ‘mood in the middle’, as middle and senior managers are engines of an organisation, and the ‘struggle on the front line’, as those who deliver the last mile to clients or pick up phones at call centres have insights that are often overlooked.?

The Impact of UK Stewardship Code

The FRC published a 87-page research report The influence of the UK Stewardship Code 2020 on practice and reporting, exploring the early impact of the revised Stewardship Code on the practice and reporting of asset managers and asset owners in five areas: (1) changes in governance, (2) resourcing levels, (3) engagement collaboration and escalation, (3) monitoring and reporting and (5) how the Code has influenced organisational behaviour.

Highlights:?

1. On Governance: Respondents have reorganised its structure to better integrate stewardship within investment decision-making. The development of centre of excellence is becoming more common. Oversight of stewardship activities typically involved the CEO or CIO. Interviews also indicated senior leaders’ involvement in stewardship, with stewardship teams tending to have a direct reporting line to the investment committee or investment management executive committee. Large asset manager respondents (>￡250 billion in AUM) have larger stewardship teams, typically averaging 22 individuals dedicating over 50% of their time to stewardship-related activities. One of the challenges of integrating stewardship and investment teams is managing differing perspectives around stewardship.
2. On Resourcing: Respondents have increased resourcing for stewardship with 29% stating they will increase resources significantly. The survey revealed that role-specific performance objectives (71%) and organisation-wide policy (73%) are the most used incentives for the?integration of stewardship within the investment process. although there is significant growth potential in responsible investment, there does not seem to be a formalised career ladder or progression stages within their organisations.?
3. On Engagement: Respondents acknowledged the growing importance of collaborative engagements and are progressing towards more asset class specific engagement and engagement with policy makers as part of stewardship activities. Although there are varying experiences of engagement across different regions, the UK Code was recognised for shaping a global approach to stewardship. Except for stock selection research, engagement by both active and index managers seems to be happening in a similar way. Active investors expressed caution around potential allegations of accessing and using insider information to manipulate share prices.? I recommend internal training and regular refreshers on how to determine material non-public information (MNPI). This chapter has further insights on asset class specific stewardship insights.
4. On Reporting: Respondents welcome the emphasis on reporting and outcomes of stewardship, although there are challenges in judging engagement effectiveness and attributing engagement success to specific entities. As such, there is an increase in the use of case study reporting to demonstrate progress.?
5. On How the Code has influenced organisational behaviour: Respondents find that a clear reporting framework leads to more reflection about stewardship practices, with deeper consideration about ways to improve weaknesses.

Finally, I take this quote from Chapter 5: “When we think of stewardship, it’s very holistic. It’s about our duty to look after the steward or clients’ assets and that encompasses not just proxy voting and engagement. It’s about our approach to how we manage those assets. So, it includes forward-looking thinking of how the portfolios need to look and what are we are doing for future generations.”

It is the same spirit that I have been driving stewardship – holistic, forward-looking, focusing on systemic issues. At times, some issues are identified early, before the industry understands their significance, such as responsible AI, which is now covered under digital rights. More recent systemic issues are wealth gap and economic inequality.

TNFD Pilot special webinar

TNFD, Global Canopy, FSD Africa and FirstRand conducted a deep dive of the recently launched TNFD Piloting Guide.

Global Canopy explained the rationale behind choosing palm oil as a pilot and shared lessons learnt; FSD Africa's financial sector pilots highlight challenges when determining trade offs.

Connecting climate and nature together rather than working sequentially is the way forward. Location data, especially for soy pilots, remains a huge challenge even though geospatial data has improved significantly in recent years.

TNFD recommends a phased approach including a beta release in November 2022, February 2023 and ultimately leading to Taskforce recommendation in September 2023.

Note: The views expressed in this article are personal and do not represent those of people, institutions, or organisations that the author may be associated with in professional or personal capacity, unless explicitly stated.?The opinions and references expressed in this article are not intended to be investment advice and should not be considered as investment recommendation.