What is stewardship and why is it important?

Committing action on climate change isn’t about appeasement or ‘wokeism’ – it’s critical to life on earth. Pension scheme members will experience the effects of climate change – for many, this will be decades into the future, and long after the current decision-makers hang up their hats.

Climate change will be disruptive, damaging and disfiguring to reputations, economies, and society.

Yet institutional investors can play a key role in driving the transition to a low carbon economy. One way this can be achieved is through engaging and/or eliminating companies that are lagging when it comes to recognising the urgency of climate change.

Why do institutional investors have influence and/or power??

It is becoming more and more urgent that we support investors in developing their engagement strategy and scheme-specific stewardship priorities, aligned with a smooth transition to a low carbon economy.

Let’s not be shy with setting ‘red lines’ around divestment from managers, strategies and/or companies when these are not aligned with these priorities.

However, divestment should be a tool that is used in an extreme instance. Divestment is just a practice by which you move the crisis of climate change into the hands of the next, instead of mitigating the companies’ poor policies.

Instead, we need to be empowering investors to be holding companies to account on climate change through voting and engagement in the first instance. Climate change will not disappear without the influence and action from every industry.

As easy as that right?

Nope! Let's not kid ourselves - this isn’t easy; if it was everyone would be doing it well.

Scrutinising changes in corporate strategy and alignment takes time, resource, and knowledge – so that is a challenge in light of finite resources and governance budgets.

Being wary, too, of greenwashing is a potential pitfall schemes must be alive to – they need expert support on these issues to distil the reality from the messaging.

Nuances across asset classes and capital structures also mean that having a uniform and binary approach isn’t appropriate – engagement needs to be tailored to reflect specific objectives.

Start-up companies are in the minority where integrating climate initiatives into their strategies could be considerably unfeasible; caution needs to be taken to ensure that this sector is not eliminated from manager portfolios.

Horses for courses

According to the PRI's report on Global responsible investment trends: Inside PRI reporting data | PRI reporting analysis | PRI (unpri.org), resource constraints are a significant barrier to RI. Resource-intensive RI practices are much more prevalent among investors in larger AUM brackets, the use of scenario analysis is much more common and larger investors are also notably more likely to be engaging directly with policy makers.

Resource constraints partially explain why larger managers are significantly more likely than smaller ones to undertake these kinds of RI practices; although it is also the case that larger investors tend to be subject to more regulatory requirements.

So, what works well for one investor may not work well for another, depending on their as well as their regions, given jurisdictional differences such as regulation and culture.

Summary

Effective stewardship is all about holding asset managers and investee companies accountable to driving real world change and encouraging better behaviours towards decarbonisation and preserving biodiversity.

Investors should be very focussed with the questions they are asking and seek both quantitative and qualitative data including examples of how ESG factors are being integrated in investment decisions.

Ultimately, without knowing where and how our money is being invested, how can we really sleep well at night? Investors should be satisfied that goals and decisions of those who are managing their money, are aligned with their objectives on sustainability, including both financial objectives and real world change.

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