Stewardship Excellence: ESG Engagement In 2021

The Evolution and Big Drivers of Engagement

Over the past decade and more, various soft and hard law initiatives have combined with investor demand as active ownership approaches and engagement have grown globally, driving more common frameworks for investment stewardship for investors seeking positive change at companies they invest in.

Since the 1970’s and 1980s, active ownership and engagement strategies have grown in sophistication and created an awareness of the importance of long-term sustainability and impacts on corporate performance and risk mitigation. When the Principles for Responsible Investment (PRI) were launched in 2006 and the financial crisis hit in 2008, stewardship and engagement gradually received broader attention and more formal frameworks for investment stewardship quickly materialized, as evidenced by the launch of the UK Stewardship Code in 2010. The subsequent decade saw growth in the evidence for positive financial outcomes from good stewardship and responsible investing, but also in the increasing risks from globally recognized issues such as climate change and social inequalities.

Some of the strong drivers of the increased investor activity in engagement are the various ‘soft law’ initiatives that have been proliferating around the globe. With close to 4,000 signatories, the PRI via their Principle 2 is still clearly one of the largest global industry advocacy organizations, representing over $100 trillion in assets.

Meanwhile, over 20 countries have published local stewardship codes, which can have a strong influence on investors behaviour as they enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders. Several global stewardship codes or principles also exist, starting with the International Corporate Governance Network (ICGN) with its Global Stewardship Principles in 2003, The European investment management association EFAMA with its Stewardship Code in 2011, followed by the OECD Stewardship Code in 2013. Moreover, in the European Union, new sustainable finance regulation such as the Shareholder Rights Directive in 2017 (SRD II) and the new Sustainable Finance Disclosure Regulation (SFDR), are making disclosure on engagement mandatory.

ESG Engagement Going Mainstream

Investor engagement with companies has been on the rise as an important element of active stewardship and may cover all or any aspects of ESG and broader company activities. Coupled with the aforementioned hard and soft drivers, many asset owners worldwide are also increasingly requiring their asset managers to be more active on their interactions with investee companies.

The last several years have also seen a surge in investors aiming to make real-world changes and taking more concrete action on sustainability. The resulting growth of impact strategies, specifically those following the UN Sustainable Development Goals (SDGs) framework, clearly indicates a shift from risk oriented sustainable investment to an attempt to measure concrete action and outcomes achieved through investment.

Global Engagement Hot Spots

Approaches to engagement have evolved differently across the globe. In the Americas, engagement has historically been strong in Canada, whereas in the United States it has become common only more recently. Growth in the numbers of PRI signatories in the Americas, 179 in Canada, 689 in the USA, and most significantly, the 147 in LatAm, coupled by the launch of the Brazilian AMEC Stewardship Code in 2016, demonstrate that investors’ appetite for engagement is emerging.

In Asia Pacific, active ownership and engagement have a long and strong history in Australia and New Zealand with a very active superannuation industry, two Stewardship Codes in place and a total of 205 PRI signatories. The rest of Asia is also seeing the number of PRI signatories rising—to date, 270 investors have signed up and in China alone the number of signatories has surged by 77% from 2019 to 2020. Japan launched its Stewardship Code in 2014 which as of May 2021 has 307 signatories and additionally, India has seen several stewardship codes emerge since 2017.

Looking at Europe, engagement has historically been an important part of responsible investment strategies in the UK, the Nordics, the Netherlands and Switzerland, pushed notably by regional Stewardship codes (UK, Netherlands, Switzerland) and the strong influence of ethically oriented asset owners (Nordics, the Netherlands, Switzerland). In France and Germany, more investors have recently started focusing on engagement as part of a robust ESG integration strategy, and additionally we are now seeing single investors in Italy and Spain in early adoption.

Hot Topics for Engagement in 2021

Results of a survey of 133 investors around the world carried out by ISS ESG in 2021 show that climate is the single most commonly shared ESG engagement priority. From a regional perspective, other important engagement topics vary somewhat between investors in the US, UK and Canada on the one hand, and continental European countries and Australia on the other. In the former group, governance, diversity and equality join climate as the most commonly identified important topics for engagement, while for investors in continental Europe and Australia, human rights and labour rights considerations join climate at the top of the hot topic list for engagement.

Conclusion

Engagement on a range of ESG topics is an important and still growing part of the responsible investment landscape and of investor stewardship responsibilities that is firmly on the world stage.

Climate emerges as the top shared topic for shareholders wanting to engage with investee companies and achieve positive change, with a range of other topics across the ESG landscape also common on engagement agendas.

The complete publication is available here.