What are the key factors to monitor in active stewardship?
Cléo Fitzsimons, Head of Sustainability at Pension Insurance Corporation (PIC), gives her views on active stewardship and where obstacles remain.
Andrew Putwainposted on Monday, October 02, 2023
Andrew Putwain: How can investors improve their plans and procedures around active stewardship?
Cléo Fitzsimons: There are several ways that investors can improve their active stewardship, depending on where they are on their journey. At PIC we try and empower investment teams and analysts to include ESG in regular company reviews. When companies are reviewed – which, in private markets, would generally be annually – we encourage ESG to be part of those discussions.
Secondly, it’s important to set out a strategy for active engagement and stewardship – which can be split between engagement and voting.
"If you decide to invest in a company, then you will have done your due diligence and once invested, you need to view your position as a partnership."
PIC are predominantly fixed income investors, so our stewardship strategy is one of engagement. The strategy involves setting clear targets, communicating what the strategy is with stakeholders including our external managers, getting buy-in from senior executives, and monitoring progress over time. As you progress, you need to track, monitor, and communicate that progress.
The third aspect is ensuring that engagement occurs by having analysts talk with companies, not at companies. If you decide to invest in a company, then you will have done your due diligence and once invested, you need to view your position as a partnership. Partnerships should be collaborative – and you’ll find that companies are much more receptive than you’d think when it comes to receiving feedback and recommendations on how to improve their ESG-related performance.
Andrew: How have these practices changed in recent years – and where do you anticipate them heading in the future?
Cléo: There’s more focus and higher expectations on what good stewardship looks like now. For example, for trustees of pension schemes, their regulator is requiring that they demonstrate evidence of good stewardship action, or action taken on their behalf.
In addition, people sitting on company Boards want to see that the companies they oversee are good stewards of the capital they invest. There are significantly higher expectations now than, say, five or ten years ago – with a particular increase in the past 18 to 24 months.
"Investor relations departments are now well versed on material ESG issues of their industry and the impact and sustainability of their company – as well as their pitfalls."
It used to be that if you said you wanted to discuss sustainability or ESG, you'd be given the investor relations representative – who would promote their corporate social responsibility (CSR) activity. It's not that anymore. There’s no longer confusion between CSR and sustainability, which is a major step forward for the industry
In addition, investor relations departments are now well versed on material ESG issues of their industry and the impact and sustainability of their company – as well as their pitfalls. This means you can have productive conversations, rather than companies attending such conversations on the defensive and trying to prove themselves.
Also, the definition of ‘good’ stewardship has changed. For instance, the industry now refers to the definition provided by the Financial Reporting Council (FRC) and behaviour is aligned with the expectations of the FRC’s UK Stewardship Code, of which PIC is a signatory. The UK Stewardship Code informs the industry on what high standards of Stewardship look like. There are also initiatives like the UN Principles for Responsible Investment (UNPRI) which helps set the tone for high standards and collaborative behaviour. Before such initiatives, everyone was doing their own thing in an uncoordinated fashion. This is much more efficient for all parties.
Andrew: Do you see it as a natural market maturation? Has the awkward introductory phase finished, and do people now know what’s expected of them?
Cléo: There is a maturity element to the industry evolution that has been seen, but it’s not something that’s staying stagnant. People increasingly recognise that Stewardship is a progressing area of the industry with quickly increasing expectations and commercial opportunities.
This means everyone is becoming more informed on what ‘good’ looks like. We’re seeing more crackdowns on things like greenwashing; people are challenging evidence and making sure that companies know what they’re doing rather than just talking.
Stewardship is easier to evidence than some other strategies, which are more subjective in their application. As mentioned, the FRC has a definition of ‘Stewardship’ that is widely accepted. It’s about utilising your position as an investor to drive better ESG-related behaviour.
Andrew: What are your top concerns around due diligence of supply chain management? Where is there room for growth and where are you deploying resources?
Cléo: Supply chains are long and complex. How far one’s responsibility or accountability stretches is hard to define. You can have the best intentions – to go as far as possible – but the further you go, the less insight and control you have. In terms of the information you receive, it’s hard to know how credible the source is.
It’s helpful when you are an investor across industries because one investment might be the supplier to another, therefore due diligence in that area can complement due diligence in another. This is a good thing to recognise and leverage.
It’s undeniable that all industries are exposed to various social issues, especially those industries which rely on production and manufacturing. Exposure to emerging markets, which often have murkier governance, also enhances exposure to social issues.
It’s a big hurdle we are all facing. An example of this is the minerals that go into electric vehicle (EV) batteries. Although an environmentally friendly end product, the materials used to make them come from countries renowned for human rights abuses, such as the Democratic Republic of Congo. Sourcing responsibly is a big issue that's hard to overcome.
"We have over 400 suppliers of varying sizes. We are working on rolling out a supplier Code of Conduct, which asks our suppliers to either abide by ours or provide an equivalent."
We believe the best approach you can take is to be realistic about the situation and aggregate your influence with that of other investors. If we alone stopped investing in renewables, it wouldn’t have an impact. Instead, our approach is to engage with other investors in a UNPRI-led collaboration with renewable, mining, and energy sector companies. By pooling our resources, we can have more influence and more aligned messaging.
Another concern is around credible information. There is still a lot of corruption in these industries. You can ask for evidence, but you need to know it’s being provided by a credible source. Practices develop where, for instance, you have phantom factories. Everyone looks happy and gets their restroom breaks, punching out at the right times. It looks fine – but then you find out the company was told in advance that the auditor was coming. It’s a showcase-only, ‘phantom’ factory. As soon as the audit is done, the real factory is revealed – multiple times bigger, where a lot of the human rights abuses are happening.
At PIC we have over 400 suppliers of varying sizes. We are working on rolling out a supplier Code of Conduct, which asks our suppliers to either abide by ours or provide an equivalent.
It's far from an ultimate solution, but it’s a step in the right direction; we’re trying to walk the talk.
Andrew: The ‘Just Transition’, which you mentioned, was discussed frequently a few years ago. Now, it seems to get less attention. Is it still as pressing as it was, especially with the cost-of-living crisis around the world?
Cléo: It's still important and is being included in things like investors’ Transition Plans. It’s still a hot topic for us – more prominent behind the scenes, but arguably will become more prominent given the recent announcement by the Prime Minister about the transition to net zero.
So far, we haven’t seen the discussion as much in the public sphere, but we do have to ensure that it is actively considered. The questions that have come up in headlines in the UK have been ‘how do we get to net zero when there’s a cost-of-living crisis?’ The discussion evolved from questions like: 'How we are going to get to Net Zero?' to 'Who is going to pay for it?', and that has driven the political debate and recent decision. Can it now be achieved in a balanced way while considering social value? These are questions we’re debating internally and we plan on expanding on them within our Transition Plan.
Cléo will be speaking at the ESG Investment Leader | Europe 2023 in London on November 2. For more information and how to register to attend, please click here.