Stewardship Strategies of Brunel's Ravishankar: Avoiding Their Transformation into Empty Gestures or Phony Tactics
In recent years, the tussle between short-term and long-term investment considerations has taken centre stage, with the anti-ESG backlash and geopolitical conflicts playing significant roles. This has led to a heightened focus on corporate ambitions and the policy dependencies that could potentially hinder their achievement.
As investors, it is crucial to scrutinize not only a company's public declarations of support but also their actions, particularly in the realm of climate change. This includes examining corporate lobbying positions to ensure consistency with public promises on climate. Transparency on what is being said and done on climate lobbying is deemed essential, given the increased politicization of ESG in recent times.
Asset owners must be able to decipher the range of tools at a manager's disposal, their appetite to deploy them, and their level of tolerance for underperformance. This is particularly important in the context of climate stewardship, where a continued misalignment can present a serious threat to long-term beneficiary interests.
Academic research has confirmed the existence of this misalignment, which has materialized in the form of inconsistent and short-term focused engagement, opaque or generic voting rationale, and a stewardship approach that presents voting and engagement as mutually exclusive practices.
The FMLC paper on fiduciary duties highlights the importance of time horizons, changes in return over time, and systemic risk in relation to climate change for asset owners. As such, investors are urged to challenge the status quo and enable a policy environment more conducive to the transition.
The last proxy season raised concerns among asset owners that managers were failing to properly challenge companies rolling back on their climate commitments. This was evident in the votes cast at companies like Exxon and Shell. Despite public declarations of support, Exxon's directors were re-elected with an average support rate of 95%, while only 19% of votes were cast in favor of a shareholder resolution at Shell's AGM that called for interim scope 3 targets.
The management at Shell painted the resolution as being 'against both good governance and shareholders' interests'. However, a constructive dialogue is needed to set out case and expectations with clarity so that managers have a strong mandate for addressing climate considerations in portfolios.
Engagement progress at companies won't be linear, and multiple strategies may be employed over time. The search results do not contain information about asset managers or mutual funds casting controversial votes on climate negotiations in their latest proxy annual report. This underscores the importance of the proxy season stocktake to understand shareholder votes about stewardship.
Asset owners that outsource their asset management need to ensure their managers' stewardship approach properly reflects their climate priorities. Effective stewardship is an iterative process that requires transparency, consistency, long-term efforts, and the ability to track progress against milestones.
In the face of these challenges, it is clear that a shift in approach is necessary. A constructive dialogue, transparency, and a commitment to long-term goals are key to ensuring that investments are made in a manner that is beneficial for both the environment and the long-term interests of beneficiaries.
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