ESG megatrends such as climate change and the next normal, growing client and beneficiary expectations, and regulatory pressures have driven strong growth in the ESG research and data market over many years. Investors are now expected to integrate ESG into their investment decisions and be active responsible owners.
However, while the volume and number of responsible investments continue to grow, regulators and market representatives are struggling to keep up with the quality. Investors and their stakeholders will benefit from a system that they can trust and that allows for easy comparability. The EU Action Plan, covering in part the Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR) provides two examples of major undertakings to improve such market dynamics. However, if we are to change the current unsustainable path we are on, everyone must do their part.
Look under the hood
We know that quality is not just the coating and design of a car, but as we start looking under the hood, we understand how complicated the technology is and how everything is connected. The same goes for responsible investments. Quality has as much to do with the people, processes and systems on which these strategies are built as it does with communicating that message through policies and disclosures and reporting on activities and progress. In this article, we will focus on active ownership and look at some best practices in investor responsibility, highlighting one area in particular where we see clear room for improvement.
Stewardship as a tool for good
One of the most important responsible investment strategies for investors is stewardship (also known as active ownership) which is the use of the rights and position of ownership to influence the activities or behavior of investee companies in which investments are made (1). The market increasingly recognizes this strategy as the most powerful tool to enable changes in corporate practices that have real-world impact. This in turn makes it one of the fastest-growing ESG strategies globally (2), which on the flip side also means that related investor practices are coming under increased scrutiny from stakeholders and regulators.
Investors are expected to clearly communicate their active ownership capabilities, including strategy, process, resources and coverage. In addition to prioritizing engagement and voting and monitoring progress, many investors have prioritized human capital development and team accountability to build a solid foundation for their overall strategy. Collaboration through global investor initiatives and networks is also being used extensively, giving engagement dialog more influence and weight. The downside to this increased investor engagement is the risk of greenwashing, i.e. investors claiming to make a difference when their activities are far from responsible.
Competing priorities
The development and implementation of ESG strategies have led to major investments by investors in data, people (often in dedicated teams) and technology, sometimes followed by a significant shift in overall investment priorities. The continued evolution of investor practices means that they continue to invest in data intelligence and information, back- and front-end infrastructure, and reporting capabilities.
In terms of active ownership, one area where investors are underspending is the engagement database to support it - the very infrastructure they use to enable dialog tracking and collaboration across individual, collaborative and outsourced engagements. In many cases, these dialogues, including compiling data and insights for reporting, are handled in simple spreadsheets, while larger, more sophisticated investors may have developed their own platform. However, the growing need for ESG-related IT development often competes with other investor priorities, such as regulatory compliance, pressure on margins and navigating increasingly complex markets.
Using technology to build capacity
Current market practice for engagement infrastructure is clearly patchy at best, very time-consuming and creates unnecessary complexity for investors. It would therefore be of clear benefit to drive these practices forward. The answer to this is technology - and this is where Esgaia can help you. By providing a SaaS platform to manage all these dialogues in one place, you will be able to simplify your workstream, improve collaboration and increase accountability. As a result, you'll save money and work more efficiently, while credibly expanding your reach and influence as a responsible, active steward of capital.
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[1] https://www.unpri.org/listed-equity/introduction-to-active-ownership-in-listed-equity-/2719.article
[2] http://www.gsi-alliance.org/wp-content/uploads/2021/07/GSIR-2020.pdf