Public equity has been the asset class most associated with investment stewardship. Today, expectations are growing for investors to demonstrate stewardship across asset classes, each offering unique opportunities to influence and drive positive change. It is important investors understand what those levers are and when they can be utilised. This blog provides an extensive list of activities across different asset classes for actionable insights to enhance your investment stewardship.
The list of activities covers the following ten asset classes:
Cash/Deposits,
Public Equity,
Fixed Income,
Sovereign Debt,
Real Estate,
Infrastructure,
Private Equity,
Hedge Funds,
Commodities,
Derivatives.
This list is also available for download to Excel, categorised according to stewardship types.
Most asset classes
Invest in assets that offer sound ESG risk management.
Invest in assets that provide environmentally and socially responsible/impactful products, services or projects.
Measure and monitor the ESG performance of the asset and portfolio.
Make use of rights and influence available to attain board representation.
Engage assets using different interactions to encourage adherence to best practices in corporate governance, ESG risk management and sustainable business practices.
Engage assets using public discourse through e.g. issuing press releases, public letters & blacklisting, social media announcements, op-eds, and similar.
Engage with the full weight of holdings, I.e. using both direct and indirect holdings, including through different asset classes.
Escalate engagement using methods such as collaborating with other investors, contacting the board, reweighting, divesting, avoiding new debt issuance, etc.
Use legal action / litigation as a last resort, if needed.
Participate in collaborative initiatives to increase influence, including on industry/value chain level.
Support initiatives across your sphere of influence targeting public policy/system-level levers.
Work with index providers on sustainable methodologies to promote well-functioning financial markets.
For indirect investments:
Identify intermediaries with strong responsible investment and stewardship credentials through due diligence.
Include stewardship and ESG requirements in legal agreements with fund managers.
Request transparency, monitor and hold to account intermediaries such as fund managers on their stewardship activity.
Cash/Deposits
Deposit funds to financial institutions that provide environmental finance and services to economically disadvantaged areas.
Advocate for (improved) ESG practices through procurement and relationship management with financial institutions.
Link/earmark deposits to specific ESG projects.
Measure environmental and social benefits of deposits.
Public Equity
Integrate ESG criteria in universe screens and investment analysis.
Use potential participation as a lever in rights issues and/or open offers.
Vote on company meetings to influence e.g. ESG-related proposals, Director elections and Say on Pay.
File, co-file or support shareholder resolutions, and negotiate with management for improvements in exchange for withdrawing proposals.
Fixed Income
Corporate debt:
Integrate material ESG factors into credit research and assessments.
Include covenants/clauses tied to ESG factors in legal documentation.
Engage for transparency in bond proceeds use, and promote sustainable practices.
Engage across the debt lifecycle, particularly at debt origination and reissuance.
Explain how proxy voting rights have been exercised where appropriate, e.g. through convertible bonds.
Sovereign Debt
Consider whether investment in different sovereign debt markets is compatible with client and organisational values.
In addition to governance and political factors, integrate broader environmental and social issues into credit analysis.
Engage with government economic and finance ministries (e.g. debt management office/Treasury/Ministry of Finance/Central Bank) on ESG-related issues, e.g. commitment and progress on the UN SDGs.
Engage beyond the issuer with other stakeholders such as trade unions and supranational institutions such as the World Bank and the International Monetary Fund (IMF) to raise stewardship and ESG issues.
Real Estate
Fund developments that support affordable housing initiatives.
Identify and investigate significant issues during construction that could impact the investment thesis such as environmental impact, health and safety issues, and community relations.
Use investment committees to discuss issues identified during due diligence to ensure transparency.
Ownership phase:
Integrate ESG criteria and standards in property management, labour and sourcing practices.
Set sustainability targets and action plans, e.g. on energy usage and greenhouse gas emissions.
Monitor and validate performance, using e.g. appropriate certifications and frameworks for real estate.
Engage and set expectations with external property managers.
Engage and exercise rights with building tenants and other stakeholders.
Infrastructure
Take account of stewardship and ESG issues in the due diligence phase of the investment.
Influence counterparties prior to investment to ensure ESG and stewardship issues are taken into account.
Explain how the stewardship approach differs for debt and equity infrastructure investments.
Consider relevant stewardship and ESG issues across the lifespan of the asset including responsibly constructing, operating, maintaining and exiting the investment, including end-of-working-life issues such as asset disposal.
Private Equity
Limited Partners (LPs) set clear stewardship and ESG expectations for General Partners (GPs) in tenders and mandates, monitor activity for accountability, and consider performance in new fundraising decisions.
Ensure stewardship and ESG issues are considered in due diligence and investment decision-making.
Facilitate training for or hiring of investee staff.
Make operational improvements and develop implementation tools at investees to address material ESG risks and opportunities.
Encourage investee companies to follow and report on progress against local Corporate Governance codes.
Consider key stewardship and ESG issues in the exit process.
Hedge Funds
Consider relevant stewardship and ESG issues in investment analysis and quantitative models, where these are used.
Ability to explain how the fund’s strategy is consistent with effective stewardship, e.g. how exposures and the investment time horizon are appropriate and how it contributes to sustainable behavioral change in issuers and markets.
Explain how the use of derivatives and short-selling (e.g. to take positions or to hedge an exposure) is consistent with a long-term approach to stewardship.
Identify and assess the environmental and social impacts of trading methods.
Commodities
Invest in commodities that are sourced responsibly.
Engage with commodity producers on extraction and production practices.
Advocate for sourcing transparency and industry-wide ESG standards across the commodities sector.
Support initiatives that promote ethical supply chains and responsible management of natural resources.
Derivatives
Derivatives have a variety of uses across the asset classes identified above. It can be used in active management such as individual security holdings at stock and sector levels. Alternatively, it can also be used in wider portfolio management, e.g. for leverage or risk management.
Active management
Explain how derivatives are used, e.g. for risk control, hedging or financial returns, and how the derivatives strategy is consistent with your approach to stewardship and time horizon. Seek opportunities to engage and influence where possible the voting policy of the prime broker or counterparty (e.g. an ISDA counterparty). Use rights where you have them and where you do not have them look for other opportunities for engagement and influence.
Portfolio management
Consider how derivative positions are consistent with long-term risks identified.
Ending notes:
Ultimately, as reflected on by the UK FCA, effective stewardship can be boiled down to the key attributes of a clear purpose, constructive oversight, engagement and challenge, culture and institutional structures that support stewardship, and disclosure and transparency of stewardship activities and outcomes.
Investors globally use Esgaia to record, monitor and report on stewardship efforts across different asset classes and entity types. The platform is highly customisable and integrable to fit different needs. Reach out for more information!