This week investors across the UK will mark Ownership Day – an initiative dedicated to encouraging equities investors to be more active owners of the companies they invest in.
There is a growing body of evidence, both empirical and anecdotal, that active ownership can encourage more sustainable behaviour by companies, leading to better value and improved long-term returns for investors.
Alongside this, there is increased pressure from customers, regulators and civil society for active ownership following accusations in the aftermath of the financial crisis that asset managers and owners had been ‘absentee landlords’. These factors, along with a growing number of Government-supported codes and frameworks for stewardship around the world, are driving significant growth in active ownership by institutional investors.
The pressure on asset owners and asset managers to integrate environmental, social and governance (ESG) issues into their investment strategies is undiminished. Funds that follow voting and engagement strategies are estimated to be worth at least €1.9 trillion in Europe and $4.7 trillion worldwide, according to the Global Sustainable Investment Alliance; and this year (as “reported”: http://www.responsible-investor.com/home/article/prxy_prev_2014/ in Responsible Investor) we have seen a record number of shareholder resolutions on ESG issues proposed at US listed companies.
We believe we have a responsibility to act as a part-owner of our investee companies by protecting and growing the money we manage on behalf of our clients. Underpinning this view is how we use our access to companies to promote high standards of behaviour and a more sustainable business model.
Therefore to mark Ownership Day and to help encourage even higher levels of active ownership among investors we wanted to offer three tips to encourage and improve shareholder engagement.Tip 1: What gets measured gets managed
The effectiveness of an engagement with a company can only be evaluated if there are clear, considered and specific criteria for success, established right at the start, and if possible linked to value generation.
For example, since 2010 Aviva investors has engaged with mining firm Vedanta Resources to raise concerns regarding the company’s performance on range of business relevant environmental and human rights issues, especially in India. As part of managing our engagement each year we ask independent research provider EIRIS to evaluate Vedanta’s performance against seven criteria which judge the strength by which sustainability issues are governed at the company. Last year we were pleased to note that Vedanta had put in place a framework to manage sustainability issues, and that recommendations concerning Board responsibility and training and establishing grievance mechanisms had been met at a basic level.
Another good example of how close measurement can drive success is Carbon Action, an initiative which Aviva seed funded, that encourages investors to engage with companies to make specific year-on-year emissions reductions, implement carbon reduction emissions and set targets. This initiative has grown to represent over 250 investors with US$19 trillion in assets under management. This targeted engagement has led to over half of the 256 engaged highest emitting companies setting absolute and/or intensity targets for emissions reductions. This is pleasing as we have found that companies with published absolute emissions reductions targets were 10% more profitable than those with intensity targets or no target at all.
Tip 2: Smarter collaboration
Many issues that investors need to engage on require collaboration with other investors. This helps to maximise influence, pools knowledge and achieves economies of scale. Such collaboration has been helped
by the emergence of new engagement forums in recent years, most notably the PRI’s Clearinghouse and, as of this year, the ‘Investor Forum’ being launched by the Collective Engagement Working Group in the UK.
To help create industry-wide efficiency gains, investors should also explore the idea of an Investment Industry Stewardship AGM. This would mean that instead of each fund or fund manager being asked to hold individual AGMs there would be one event – convened by industry associations such as the National Association and Pension Funds and Investment Management Association in the UK – where asset managers could present their stewardship statements to representatives from all asset-owning clients.
Such an AGM would bring together trustees from the major pension funds and CEOs or CIOs of the major asset managers to discuss stewardship issues and to vote on asset managers’ stewardship policies.
Tip 3: Connect the missing link in the chain: the public
Although the nature of active ownership is often private discussion, investors and companies should not have these conversations in a vacuum. It is important that the wider industry works to engage the public on investor stewardship, the people the funds are run for.Research commissioned for Ownership Day this year found that almost half the British public (48%) believe institutional investors should have stewardship responsibilities in the companies they invest in. The industry needs to show that it is responding to this desire.
One of the fundamental problems with the ownership chain of influence is that it remains extremely difficult for the end investor (i.e. adults with savings) to know how their AGM votes have been cast, what ownership influence has been exerted or even, in many cases, where their money is invested. Finding ways to be more transparent and to communicate stewardship to end investors can help to not only enable more and better shareholder engagements, but perhaps also help to rebuild public trust in capital markets.
Stephanie Maier and Abigail Herron are, respectively, Head of Responsible Investment Strategy and Research and Head of Responsible Investment Engagement at Aviva Investors.
The view and opinions expressed represent the views of the authors and are not necessarily the views of Aviva Investors.