ESG feature – Passive investing & stewardship
tainable financial returns. “It is a misconception that index managers do not have the tools to drive change because they cannot sell stocks that may not fulfil their sustainability expec- tations,” Jankovic says.
“Through engagement and voting we express our views as shareholders and help drive long-term change within compa- nies,” she adds. Through engagement we build an understand- ing of a company’s approach to governance and its sustainable business practices. We also communicate our views publicly, so companies know what we expect of them.” For Jankovic, the absence of the ultimate threat of divestment will not impede the growth of the ESG-focused index market. “Index fund managers continually engage to drive long term change. This is the value of patient capital,” she says. In the passive world, this is the way shareholders should push for change. The index managers that have the power to sell stocks to improve the ESG performance of their index fund could leave investors disappointed. “If you are a passive man- ager, it is expected that the tracking error to your index is min- imal,” Charles says. “If you start divesting you run up against that problem. Divestment, unless you are prepared to compro- mise on the tracking error, is not an option,” she adds. So, it is for good reason that the majority of passive managers do not have the discretion to sell stocks. But there is another positive to being a forced owner. “There is also this angle that divesting takes you away from the table,” Jankovic says. “As an index holder you have regular dialogue with management, and that engagement provided by your holding gives you influence.”
Come together For smaller investors regular dialogue with corporates can be difficult, even when an active manager can dangle the ultimate threat of selling the stock above a chief executive’s head. What could help, active and passive managers alike, is several share- holders increasing their influence by working together. “Collaborative work is an important escalation tool,” Burger says. “A critical mass of investors could help further a debate or influence change at the corporate.” But he fires a warning that although strength in numbers could improve the chances of creating change within a corpo- rate, such success must be earned. “Do not underestimate the time, energy and resources required to effectively collaborate with other investors,” he adds. “It is a significant commitment over and above one-on-one engagements.” Jankovic also sees value in a different collaboration, with Black- Rock being a member of several investor-led initiatives, includ- ing Climate Action 100+. “Collaboration groups are useful on policy-related issues such as transparency and disclosure, climate risk, diversity or enhancing shareholder rights, but BlackRock’s stewardship activities are focused on direct dialogue with companies, as we have the largest team in the industry,” she says. There are so many shareholder pressure groups around that Charles believes there is no excuse for passive managers not to engage with companies in their index. “The expectation is that if managers, no matter how small, are offering passive invest- ments they should offer something on the engagement and collaboration front as well,” she adds.
While voting sends a strong signal to management it does not mean it’s the end of the road. On the contrary, it can lead to an escalation of the issue at board level.
Marta Jankovic, BlackRock Investment Stewardship
Although being part of some of these investor initiatives, Black- Rock’s stewardship activities are focused on direct engagement with companies and voting at shareholder meetings. “It is in the long-term interest of our clients for us to establish a dia- logue with companies, so we have an opportunity to share our views on topics that we think are material for their long-term performance,” Jankovic says. “It is because we are long-term investors through our index portfolios that we can build the trust that supports this continued effective dialogue.”
A powerful sign
There is a tool that is the ultimate way of showing your dissat- isfaction with a company’s ESG performance: voting. Through expressing their views in this way, shareholders are sending a big signal to management, Jankovic says. “We have that option; it is a strong one.” But Jankovic warns that you should not exercise such an action lightly. “Engagement comes first for us,” she says. “Voting is the mechanism we can use if engagement has not, over a sig- nificant period of time, led to change.” For Burger, this is all part of the engagement process. “Voting
42 | portfolio institutional October 2020 | issue 97
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