ESG feature – Passive investing & stewardship
Spending time understanding the unique circumstances of the company is part of engagement, Burger adds. “To be successful in an engagement, one needs to understand what the circum- stances of the company are.” But there could potentially be a silver lining to blocking the re-appointment of a director in that their replacement may be more willing to engage with investors.
Passive investors need to be active stewards because they are forced owners of companies with significant ESG concerns. Ian Burger, Newton Investment Management
is a useful tool in formally recognising concerns. Can it effect change? Yes, it can,” he says. But this may not be the case across the whole portfolio. Those holding US stocks will not have the power to block a board appointment. “Shareholder votes are votes of confidence in US companies,” Burger says. Even in the US, such action can show huge dissatisfaction. “Voting against management is a tool in the toolbox,” Charles says.
There could be a feeling that if shareholders are voting against management on a particular issue that engagement has failed. Jankovic does not agree. “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. It is not closing a door; it is about sending a strong signal of concern about something you find important as a shareholder,” Jankovic adds. Manuel goes further by explaining that a vote should not be taken at face value. “A vote against management needs to be considered in the context of the overall objective that a passive manager is trying to achieve before deciding if engagement has failed,” he says.
The right path ESG is a broad church and there are many different changes sustainability-focused investors want to make to the world, from ending climate change to abolishing pay inequality and raising the standards of human rights. To help bring clarity here, BlackRock has developed a framework across all asset classes that helps match investors to their sustainable objectives.
The framework could help investors find index strategies that focus on themes, exclusions, fixed income or are tilted towards high ESG performers. “With sustainable investing there are different pathways for investors,” Jankovic says. “Our frame- work is a good way to approach the topic because there is no one-size-fits all solution.”
Despite the explosion in their number, funds tracking indices with an ESG angle are still being perfected. The first genera- tion were blighted by a lack of comprehensive data needed to tilt them towards a particular issue, but they are improving, Manuel believes.
“The second-generation indices attempt to be more forward looking in how they are constructed,” he adds. “They try to incorporate information that will highlight the companies which will have better ESG characteristics in the future or are better positioned to manage through the low car- bon transition. That has been a big development in the passive market.”
And developments such as this are needed to continue to attract and adequately manage sustainable passive mandates. The ruling on stewardship and passive funds will clearly help boost the ESG performance of such vehicles. Passive investing is now playing a bigger role in creating a more equal society and helping the world transition to a low carbon economy. A welcomed development.
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Issue 97 | October 2020 | portfolio institutional | 43
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