Strengthening investment stewardship practices

Along with broader issues around greenwashing, the whole stewardship proposition is, quite rightly, clearly under industry scrutiny at the moment. Inadequate stewardship resourcing, an overemphasis on both quantity versus quality and company versus industry/policy engagement, as well as an inability to track progress on real-world outcomes are just some of the claims laid at stewardship’s door.

To avoid ‘engagement washing ¹’ or ‘tea and cake engagement’, we as an industry must go back to first principles and scrutinise whether we are allocating our limited stewardship resources to achieve maximum impact. Having a stewardship programme rooted in a theory of change – which explains how the activities undertaken contribute to a chain of events that lead to the intended impacts – is absolutely vital.

Rooting stewardship in strategy

This prioritisation framework is the core of The People’s Pension’s newly launched Responsible Investment Policy.

Being a well-diversified investor with “universal owner” emphasises the importance of taking a systemic approach to stewardship and accentuates the need for the Trustees of our scheme to prioritise our resources on a few key areas.

These include focusing on a cluster of ESG risks with compounding or interconnected effects, which is why we have identified climate change, nature and human rights as our stewardship priorities.

We have also strengthened our expectations of our fund managers, which includes determining how aligned our current and future fund managers are to our Responsible Investment Policy. Having appropriate escalation measures in place should those expectations not be met is central to our stewardship approach.

Accountability in stewardship

One way we will hold fund managers accountable is focusing on their commitment to stewardship resourcing. If this remains unaddressed, we cannot deliver at scale the real-world outcomes that we are looking for concerning our stewardship priorities.

We recognise our role as providers of capital to drive necessary change in this area, which is why we are actively involved at an industry level to address the issue² . Therefore, as a minimum requirement as part of our manager selection process, we are looking to partner with fund managers with a suitable commitment to above-average stewardship resourcing relative to its peers.

Participation in industry, collaborative, and policy engagements is also a key plank of our policy because building coalitions of like-minded investors is a key lever to delivering a more sustainable financial system. We expect fund managers to take a leading role in shaping this agenda, with a particular focus on our stewardship priorities.

We also take seriously our net zero commitments, and expect our fund managers to do the same. One crucial way we will test this commitment is by determining how aligned their voting behaviour is with our net zero voting guidelines.

Driving real-world outcomes

With a robust theory of change in mind, we have prioritised systemically important sectors linked to fossil fuel reliance (both supply and demand), deforestation, and financing (banks). We have also prioritised deeper scrutiny of climate disclosures on capital expenditure, climate lobbying and financial statements as we believe these areas represent a true test of a company’s net zero commitment.

Through this Responsible Investment Policy, we are committed to playing our part in driving change and addressing industry concerns around the effectiveness of stewardship as this will contribute to better member outcomes. While there are practical challenges, let it not weaken the importance of stewardship in principle but galvanise people to work together as an industry to address them. As John F. Kennedy said in his famous moon speech, “we do these things not because they are easy, but because they are hard”.

By Leanne Clements, Head of Responsible Investment for The People’s Pension