Inside view: Dialling up the heat on smarter stewardship

ShareAction chief executive Catherine Howarth explains how investor pressure can be an effective weapon in the battle to rescue critical ecosystems.

A significant intervention by the UN’s Intergovernmental Panel on Climate Change (IPCC) in July warned that critical ecosystems are perishing under the strain generated from burning fossil fuels, felling forests, from rearing livestock for meat and dairy, and from the fashion industry.

This raises big questions for fiduciary investors, who operate inside a system that is designed – at present – to sustain businesses that exacerbate these ecological challenges.

It doesn’t have to be like this. All investments generate impacts on society and the environment, invariably a blend of positive and negative impacts. A first step is for investors to get a handle on the material impacts being generated by firms in their portfolios. Integrated reporting is a vital tool for this, and all fiduciary investors should encourage their investee companies to provide them with data and reporting that rigorously and honestly describes their material impacts – both positive and negative.

It is then entirely possible for investors to engage with companies’ boards and senior managers to encourage them to act to minimise the negative impacts of their operations and business models whilst dialling up the positive impacts and investing capex in smart new solutions to the challenges we face in the 21st century. Those solutions can often be commercialised and become a source of new profitability for the future.

Stewardship is central both to this process and for the mindset of 21st-century fiduciary investors. For example, investors can engage with companies in the cement and steel sectors to press for publication of ambitious low-carbon transition plans that drive resource efficiency and energy efficiency into the heart of their business models. Decarbonisation that delivers net-zero emissions by 2050 is profoundly challenging for these sectors. But it is not impossible. Achieving it can only be done with the fully engaged support of long-term investors as well as policy-makers and major clients.

The UK’s pending new Stewardship Code, due for release this autumn by the Financial Reporting Council (FRC), looks set to guide investors down this track of considering and addressing material business impacts on society and environment. We warmly welcome this as we believe it serves the long-term interests of millions of working citizens who entrust institutional investors with their retirement assets. Indeed, investor consideration of business impact is not some nice-to-have, it is becoming central to what is required if fiduciaries are to truly serve their beneficiaries’ best interests.

Acting on purpose
The lives and futures of European citizens will be profoundly affected by climate change, biodiversity loss and other ecological risks. Those citizens deserve fiduciaries in the investment system who are acting with purpose to reduce those risks in their lives.

At a Europe-wide level, it is essential that the European Commission puts stewardship by investors at the heart of its ongoing policy reforms on sustainable finance. There is much in the UK’s new Stewardship Code to draw on for inspiration, a point made recently by the chief executive of Sweden’s largest pension fund, Alecta. The Commission will, however, want to undertake its own process of further thinking and policy development on investor stewardship, linking it with the work already committed to in Brussels to review corporate reporting.

A particularly positive new feature of the UK’s soon-to-be-released new Stewardship Code is the requirement on investor signatories to publish a yearly report detailing the outcomes of their engagement with companies. This helps to shift the focus of stewardship from policy to practice, and it makes stewardship activities subject to greater accountability.

European investors are already at the forefront of many of the world’s most ambitious stewardship initiatives. Two notable examples are Climate Action 100+ and the Workforce Disclosure Initiative. Both projects start from a recognition that pension savers have a deep interest in companies that manage climate risks proactively and treat employees with dignity. Millennials, in particular, are hungry to live in a world with purposeful businesses who contribute to their quality of life. They have every right to expect their fiduciaries to be on the front foot in their dealings with investee companies to ensure they operate without imposing costly risks on their ultimate investors.

Once institutional investors recognise stewardship as a tool to address the interests and living standards of beneficiaries considered in the round, they unlock a huge array of opportunities to be profitable yet impactful in how they deliver their duties to those beneficiaries.

Business purpose is constantly in the headlines. Far less is said about the purpose of investment organisations. Now more than ever, it is vital that investors live up to their own purpose, becoming responsible stewards who seek actively to support healthy societies and businesses that operate within scientifically informed ecological limits. People who entrust professional investors with their assets deserve nothing less.

Catherine Howarth is chief executive of ShareAction, a charity that campaigns for responsible investment

©2019 funds europe

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