Put simply, good engagement leads to better client outcomes over the long run – and the opposite also applies
Engagement matters in the investment value chain. It’s a necessary reflection of the fiduciary duty to deliver the investment promise through positive investment returns and managing risk, and it’s core to delivering net zero and other sustainability ambitions.
Put simply, good engagement leads to better client outcomes over the long run – and the opposite also applies – so naturally, we spend a lot of time looking both for good engagement practices and areas for improvement.
Our understanding of good engagement is framed by the Stewardship Code, which sets standards for asset managers and other investors for how they work with investee companies to deliver long-term performance.
When researching for our latest engagement report (Stewardship Code Reporting Analysis), examining 36 asset managers representative of the broader market, we found plenty of examples of both good and weaker engagement.
It isn’t all about the numbers
What’s very clear is that managers like reporting lots of stewardship activity. In one case, this included claiming over 10,000 engagement actions in relation to the 2,000 companies they hold.
And while this was an outlier, there were a dozen other managers who reported carrying out more than 1,000 engagement activities across the year. Others reported nearer 200 – this discrepancy can’t just be explained by size or number of companies held. Instead, it seems that different managers view and count engagement in very different ways.
We favour the definition from the Investor Forum, a not-for-profit group of investment practitioners championing better stewardship standards among UK institutional investors. They say “engagement is active dialogue with a specific and targeted objective”.
To us, this means that a quality engagement must be both substantive in its efforts as well as proactive – not reactive.
Beware home bias… and other skewed geographies
If asset manager engagement is widely dispersed from a numeric perspective, it is not from a geographical one. It is concentrated, with clear instances of home bias.
For example, one manager we examined does as little as 3% of its engagement in the Asia Pacific region. Meanwhile, three of the very largest US managers deliver over two-thirds of their engagement in the Americas, the bulk of it in the US.
It’s hard to determine exactly how such proportions correlate to the spread of investee companies and clients. But we doubt that the driver for activity is always client exposures: there seems to be an element of convenience for managers. And these are not isolated examples.
It’s not always a case of home bias. Another US active investment house delivers nearly half of its engagement activity in Asia and a third in the Americas, with EMEA relatively neglected at 18%. A large European manager has a remarkably similar split of numbers. In neither case does this reflect the weight of their assets under management, which is skewed towards their home regions.
E, S or G?
There is also an uneven distribution across environmental, social and governance issues.
Despite the focus on climate (where disclosed separately, it typically accounts for the bulk of activity in the environmental area), “E” overall forms only a third of all engagement reported by our sample of managers.
The largest portion of activity – over 40% – remains dedicated to governance matters. Social issues are relatively neglected. They’re just under a quarter of the total.
Exactly a third of managers do not disclose their ESG split in their engagement reporting, which we believe is a basic expectation.
If we could have just one thing
Clearly, there is some best practice here – and some less-than-best – but if we were to spotlight just one area where managers can improve, it would be the quality and consistency of case studies.
Again, we want to understand whether engagements are substantive and if they were proactive.
Stories of engagement from our research vary considerably.
We know that the case studies put in front of us only cover a very small proportion of the total number of companies engaged with: for most, it was less than 4%; some highlighted 21%, others not even 1%.
Nevertheless, this should still give scope for really strong stories. Even if respondents want to be discreet about some of their activities (which may be ongoing), these case studies are still the highlights they are choosing to make public. We expect them to represent their very best work – the ‘crème de la crème’ of stewardship activity. But do they?
Well, there are certainly many instances where asset managers have set a measurable goal aligned to investor outcomes, have used it to shape their engagement priorities and are now making progress towards achieving that objective. Which is good.
Another strong example is the manager with the lowest number of engagements in our sample. It delivered a higher number of substantive case studies than more than half the overall sample, including eight managers who report much more activity. Unsurprisingly, we will tell our clients of our greater confidence in the quality of stewardship by this manager than by the other supposedly more active firms.
However, within the whole pool of case studies, 17% do not appear to feature any disclosure of actual engagement. For one manager, that’s the case for more than half of its entries. And while most examples are of proactive work, seven managers relied only on reactive activities for more than 60% of their case studies. If this is the cream, some of it seems to be curdled.
When managers deliver their 2023 engagement reporting, we would like to see more detailed qualitative insights. Clients want to know exactly how engagement delivers effectively, where further effort is needed – and, of course, where engagement is falling short.
In the long run, that level of exposure will not only incentivise improvements; it will nurture the archives of industry best practice from which others can draw their inspiration.
Paul Lee is the head of stewardship and sustainable investment strategy at Redington