Stewardship, ESG and upcoming AGM's

25 April 2023 - by Jennifer Strachan

A review of leading Managers’ evolving approaches to Stewardship and ESG given the upcoming AGMs

As companies head into AGM season, we consider the approach some fund managers take to stewardship, as part of their approach to sustainability. At IAM, we believe that active ownership, when structured correctly, can deliver better risk adjusted returns than passive funds. With active ownership comes an obligation to use shareholder votes as a key pillar of any stewardship policy.

Recent updates come in the form of letters to company CEO’s, letters to investors and Stewardship Reports from 2022 have started to land. We have selected a few to get a snapshot of where fund managers are headed. They make a fascinating read.

Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing for Fidelity International set out their approach to Europe’s upcoming AGM season in a recent newsletter. Fidelity’s three main stewardship pillars are the cost of living crisis, a continued push for net-zero action and further advocating for improved diversity and inclusion.

Fidelity recently released their Deforestation Framework, which formalises their stance on climate and nature issues and how they plan to use their vote to hold boards accountable. This framework is in line with their 2023 sustainable investing priority to support natural capital, enabling the transition to a circular and more sustainable economy. Fidelity confirms that under their voting guidelines, they will vote against companies that fail to meet minimum expectations on climate governance, policies and disclosures.

Mr Tan said “We are strong advocates for gender and racial diversity. From a business perspective, we believe it can have a positive impact on long-term value creation and risk mitigation - this should increasingly encourage boards to seek candidates with different skills and backgrounds. Where we feel this is not being achieved, we will actively engage and consider voting against company management in most developed markets that do not have at least 30% female board representation.”

Mark Versey, the CEO of Aviva Investors (with £232 billion AUM), set out Aviva’s stewardship priorities in his recent CEO Letter to companies they invest in or wish to influence. He also identifies the cost of living crisis as a priority, joined by transitioning to a low-carbon economy and reversing nature loss. Further, he noted that for Aviva, tactical decisions by companies to address short-term challenges cannot undermine longer-term sustainability objectives. He commits Aviva to “hold company boards and directors accountable where progress does not reflect the urgency required.”

Just as the energy price rise has focused minds around the role of renewable energy in providing a stable energy price, arguably the resulting cost of living crisis has focused minds on the “S” in ESG. Aviva explicitly calls for support for stakeholders, setting our explicit expectations for companies paying a living wage, offering financial support to lower-income workers, engagement with trade unions, upholding human rights, showing restraint on executive pay, and supporting vulnerable customers.

“As strong supporters of the UK Transition Plan Taskforce Disclosure Framework, Aviva encourages companies to pay particular attention to many of its components.”  Finally, Aviva says “companies have a critical role in engaging governments to establish supportive regulatory regimes that align subsidies and fiscal policies with the delivery of the Montreal targets [Post-2020 Global Biodiversity Framework]” to help reverse biodiversity loss.

Black Rock’s most recent CEO letter made headlines when Mr Fink discusses the global energy transition. While he emphasised their view of “climate risk as an investment risk” he also acknowledges Black Rock has clients with “a range of investment objectives and perspectives” when it comes to the transition to a low-carbon economy. His statement that “As minority shareholders, it’s not our place to be telling companies what to do.” hit international headlines. But he also emphasises that BlackRock has been vocal in recent years in advocating for disclosures and asking questions about how companies plan to navigate the energy transition, which ensures that their approach is still pushing companies to plan and explain their plans to meet their self-made commitments. He stops short of indicating any voting, escalation or divestment plan for those companies that fail to do so.

Legal and General has taken an explicit approach to the same point – pushing companies to publish their plans for net zero commitments and data to back this up. They have published their voting intentions for 2023 in a recent article, which align with their support for the goals of the Paris Agreement. Notably, this includes supporting resolutions, against management recommendations, for a range of climate resolutions at North American banks. Their rationale is that LGIM “consider that decarbonisation of the banking sector and its clients is key to ensuring that the goals of the Paris Agreement are met. Accordingly, we believe our support of many of these resolutions … is warranted.” “we continue to emphasise that the boards of financial institutions need to closely consider their strategy and risk appetite towards fossil fuels into the near future. As such, we believe that many of the proposals that ask the board to devise their own time-bound phase-out strategy are supportable.”

LGIM are also supporting proposals for additional reporting on aligning financing activities with published 2030 targets. “We believe detailed information on how a company intends to achieve the 2030 targets they have set and published to the market ..can further focus the board’s attention on the steps and timeframe involved and provides assurance to stakeholders.

But LGIM, like Black Rock’s statement, highlights that “the onus remains on the board to determine the activities and policies required to fulfil their own ambitions, rather than investors imposing restrictions on the company.”

Such an approach might seem reasonable, but it is striking that the majority of these shareholder resolutions, requiring boards to devise and publish their own net zero plans, as noted by LGIM, are not being recommended by management.

Just in time for AGM season the IIGCC has published its Net Zero Standard for Oil & Gas

It is not just fund managers that are pressing for more clarity on transition plans. Just in time for AGM season the IIGCC has published its Net Zero Standard for Oil & Gas, setting out a comprehensive framework for investors to assess the alignment of oil and gas companies’ transition plans with net zero

Finally, we find that Fund Manager Stewardship Reports are useful reviews of their work in 2022 with some indicators of how they will approach 2023. They will often explain their approach to companies, their reasons for voting against the board recommendations at shareholder meetings, and how often they do so. There are often interesting case studies, which, whilst self-selected, do give a snapshot of initiatives in successful company engagement.

As noted in the recently published 2022 Veritas Stewardship Report: “We believe shareholder voting is an important way of communicating with companies and helps in our efforts to build long-term relationships.” While “engagement” potentially covers a wide range of possible topics, Veritas noted that “Once again … ESG factors featured heavily in our engagement work. This was not because we believe ESG factors matter more than other issues, … as the long-term financial risks posed by these ESG factors become increasingly apparent, we believe this is where our companies can make some of the biggest improvements to ensure the long-term durability of their business models.”