ShareAction has proposed a standardised framework for asset managers to escalate their engagement practices, after its research found fund groups were “failing to engage robustly with the companies they invest in”.
In its second guidance paper in its Responsible Investment Standards and Expectations (RISE) series, ShareAction said it was difficult to see how, and to what extent, asset managers are escalating with their investee companies after the NGO reviewed stewardship and sustainability reports of 50 of the world’s largest asset managers. These revealed limited disclosure on the use and outcomes of escalation, ShareAction said.
See also: – Gap between asset managers’ climate claims and action remains wide
Escalation, the report said, is critical as if firms do not act when their engagement is not working, firms will accept there is no consequence attached to them failing to respond appropriately to investor concerns. Recent research from Redington also revealed asset managers’ hiring for engagement and stewardship roles has come to a standstill while engagement progress is stalling in many parts of the industry with 30% of companies unable to evidence that ESG is driving specific changes. Similarly, this month, the Financial Conduct Authority said it had found stewardship activities in the UK are not meeting sustainability guiding principles and said “stewardship approaches generally did not meet our expectations”.
“Unfortunately, the use of escalation is inconsistent and often ineffective [at asset managers],” commented Niall Considine, head of investor standards at ShareAction. “Further, disclosure of escalation is poor and therefore stakeholders cannot assess and compare how effectively asset managers are using this vital tool.
“Our paper lays out a standardised framework for a more ambitious and consistent use of escalation tools, supported by improved reporting. We urge asset managers to adopt this framework so that escalation is more transparent and delivers better results.”
Escalation toolkit
ShareAction is therefore proposing a standardised framework for escalation which will allow:
- Clients and other stakeholders to assess and compare how asset managers are using escalation tools.
- Companies to understand how their strategic choices will affect their relationship with investors and how it might impact access to capital.
- Investors and other stakeholders to identify overlapping goals and common purposes.
- Other asset managers to be spurred to a more ambitious, consistent use of escalation tools to guide companies onto a path that benefits people and planet.
In the guidance paper, it sets out steps asset managers can take should the adopt the framework, and has identified how to work separately with listed equity and corporate debt investments.
This starts with ‘business as usual’ dialogue and monitoring before moving on to more frequent collaborative calls and being cited in the media challenging the company’s position as past of the next step.
If this doesn’t work, the escalation framework suggests voting against directors etc and resolutions and in exceptional circumstances seeking board seats.
In terms of capital allocations decisions, the following steps would be to reduce exposure and/or divest and exclude from labelled funds before – the last resort – divesting and excluding from all company holdings and communicating this publicly.
The guidance paper also lists further considerations for asset managers to consider when implementing the ‘escalation pathway’ and goes into detail on further expectations for firms.
See also: – Green Dream with Fidelity’s Tan: Divestment is a failure of engagement
“Escalation is a powerful tool in influencing change at companies that are having damaging impacts on, and are exposed to risks from, environmental and social factors”, the report said. Due to the current lack of standardised reporting on escalation, as well as on engagement more widely, it is currently not possible to assess how and under what conditions escalation tools are being used.
“This standardised escalation framework will enable consistent reporting, so that the use of escalation tools can be measured and compared between asset managers. The escalation framework introduces a coherent, overarching structure, while allowing for bespoke application to individual company circumstances. It can also encourage more consistency between asset managers, and greater ambition and purpose in their engagements,” it concluded.
