WHEB Asset Management has called for “urgent industry consensus” on stewardship and engagement definitions and practices in its latest white paper, citing a rise in ‘engagement-washing’ in ESG funds owing to “industry confusion”.
The report From obstacles to outcomes: Enhancing effectiveness in stewardship and engagement highlights three key barriers the industry needs to overcome to ensure investor stewardship and engagement can reach its full potential.
Investors need to reach a consensus on key definitions, such as what an ‘engagement’ is and how effectiveness should be measured, the report said, and although there is wide agreement within the industry on
the fundamental purpose of investor stewardship, beyond this essential role there is much less consensus on the underlying elements, citing the lack of agreement on how – or even whether – stewardship and engagement should be linked with the mandate behind a given investment strategy.
It also advocates greater focus on engagement effectiveness in achieving clear objectives, rather than just activity levels. Better targeting of engagement through a clearer focus on materiality, it argues, would help, freeing up resources to be more efficient.
Finally, the paper explains that, in its current form, engagement reporting is resource-intensive and limited in its utility for evaluating effectiveness. Therefore, there’s a need for better reporting and communication of the outcomes that have been achieved, evidencing how a specific investor contributes to an outcome and how this delivers value for clients.
These obstacles “are not existential threats” but rather growing pains symbolic of the rapid development in stewardship and engagement practices, Seb Beloe, partner and head of research at WHEB, concluded.
“Good practices developed by WHEB and other practitioners are outlined in the paper. These offer potential solutions to strengthen the role asset owners, managers and other practitioners can play in helping to accelerate the delivery of a zero-carbon and more sustainable global economy.”
The report comes as the Financial Conduct Authority recently dropped its stewardship outcome framework, citing “challenging” complexities. Earlier this year, the Financial Reporting Council embarked on a “significant update” to its Stewardship Code to reduce reporting burdens and strengthen stewardship outcomes.
Rachael Monteiro, stewardship and climate analyst at WHEB, added: “‘More activity’ appears to have become the dominant narrative in investor stewardship and engagement in recent years. In our view, this misses the point. Instead, the focus should be on ‘more effective’ stewardship and engagement that fulfils its purpose in delivering long-term value for clients.
“The stewardship and engagement industry is at a critical juncture. Fiduciary duty, client demand and now regulatory requirements are creating real appetite for more effective engagement. The industry needs to tackle these three key barriers if its potential is to be realised.”
