Asset owners should pay close attention to whether asset managers have a clear policy setting out actions they may take if their engagement with companies has not proved effective, according to UK charity investor Friends Provident Foundation.
It identified an engagement escalation policy as one of seven minimum ESG market standards that asset owners should consider in asset manager tenders and reviews.
The recommendations are set out in a report capturing analysis of proposals from some 60 investment managers that bid to win a £33.5m (€37.9m) mandate from three charities. In what they dubbed an ‘’ESG investing olympics” the charities made the mandate public and invited five shortlisted managers to present to an audience of like-minded asset owners, and some grant recipient NGOs.
The trustees were most impressed with the proposal from eventual winner Cazenove.
Overall, however, according to Friends Provident Foundation, analysis of the proposals showed “serious gaps in ESG market standards” that needed plugging unless the ESG market were to suffer a hit to its credibility.
In the report, author Colin Baines, investment engagement manager at Friends Provident Foundation, said the best proposals from managers “demonstrated programmes of active and meaningful engagement, from raising points of difference and requesting action via letters and meetings through to more forceful stewardship, such as co-filing shareholder resolutions”.
“Their engagement also went further than just requesting better disclosure or targets in the distant future to actual behavioural change, such as requesting new strategies and policies with short and medium term targets,” he said.
Best practice on top of this, according to the report, is for asset managers to develop a clear engagement escalation policy, for example setting out how managers might vote against board re-elections or ultimately divest.
Another minimum standard, according to Friends Provident Foundation, should be a presumption to vote in favour of ESG resolutions, taking a “comply or explain” approach. The other recommendations were regular disclosure of all holdings, voting record and engagement activity, and for social issues to be better integrated in investment decision-making.
Baines said: “With the exponential growth of the ESG market and new entrants including some of the world’s largest managers, there is enormous potential to effect real positive change. But there are also risks to the credibility of ESG as a concept if the approach taken is too piecemeal or tokenistic.
“Our report shows that many asset managers do not currently meet standards which we would consider to be basic tenets of ESG, but many were willing to adhere to win the tender. The best proposals met and exceeded them, but for some winning would have meant the type of behavioural change that is required across the market if it is to be authentic. It would appear the only barrier to meeting these standards is the will to do it.
“To help effect that change we hope other asset owners will consider our recommendations as minimum ESG standards in investment manager tenders and reviews.”