Stewardship: More than just a trend – The future of sustainable investing (Part 2)

The second part of the interview emphasises the importance of stewardship as a driving force for positive change in companies, particularly with regard to climate and social issues. A long-term, strategic approach with clear goals is key, supported by ESG data and direct engagement. While policy changes in the US may pose challenges to stewardship, Europe is showing growth.

It is expected that asset management will continue to develop and remain central to sustainable investing. Stewardship means that investors not only put their money into companies, but actively engage in their management. thebrokernews talks to Marion Ehringhaus, Sustainable Finance Expert at Wavestone.

Regular reporting on the state of the talks, including successes and challenges, is also important. How can investors ensure that their stewardship activities actually lead to positive change in companies?

Marion Ehringhaus: To ensure effective stewardship, a strategic and long-term approach is crucial. First, clear and realistic goals should be defined and continuously monitored. To help companies implement improvements, it is helpful to use best practice examples from the industry sector and to promote the exchange with companies that have already successfully mastered similar challenges. A long-term commitment is essential to achieve sustainable change. It is counterproductive to arbitrarily change topics and companies on an annual basis.

In view of the current political environment, it will be interesting to see whether all active stewardship participants will consistently continue their efforts. It is crucial that investors do not let themselves be discouraged by short-term fluctuations or political uncertainties, but rather stick to their stewardship goals in the long term.

What is the significance of stewardship in overcoming global challenges such as climate change and social inequality?

If you want to have a direct impact as an investor, you would actually have to invest in impact funds, but these carry an increased liquidity risk. However, since most people invest their assets in listed companies, stewardship is the best way to influence companies‘ adaptation to climate change and the reduction of CO2 emissions. Stewardship can also positively influence social aspects, for example by helping to combat child labour in the mining of raw materials or on cocoa plantations and promoting respect for human rights in the production of goods. The importance of this can be seen from the fact that several American companies no longer do business with banks, pension funds and fund managers if they demand sustainability targets for their investments. This shows how influential voting and engagement can be.

How do you see the future of stewardship – will it continue to develop or will it lose importance?

In the US, under the guise of ‘democratising voting rights’, the power of voting as a pool of investors is deliberately being broken. They want to enable each individual fund investor to decide for themselves how they want to vote, i.e. it is likely that all Republicans will soon vote on anti-ESG voting guidelines, thus reducing influence and fuelling further CO2 emissions and climate change. In Europe, especially in Switzerland, the topic is still growing strongly. How seriously shareholders and investors in Europe really tackle climate change and sustainability will become apparent in the coming months and years. I dare not make any predictions, but I do have hope that it will continue, especially with American companies. The MSCI, DJ and S&P sustainability indices should not lower their thresholds either, but should instead decisively remove companies that do not meet the requirements from the index. Only this will ensure the credibility of the indices. It is quite possible that after the anti-ESG backlash, there will be a strong pro-ESG movement again in four years‘ time, so we should be prepared for that.

Overall, however, I am confident that stewardship will play a central role in the future of the financial markets. It will continue to develop by adapting to new challenges and opportunities and benefiting from technological advances.

What role do ESG data and analysis play in developing stewardship strategies?

Generally speaking, more ESG information allows investors to make better-quality decisions about their investments and to minimise risks. The more you can learn about the company you are investing in, the better and more tailored the engagement goals and expectations can be formulated. To prevent stewardship washing, voting results and engagement activities must be published so that external analyses can be made for credibility. Compared to other investment approaches, stewardship relies less on data. Much can be done interactively in dialogue with the company and still be effective, even if the data basis is poor. Often, one of the requirements of engagement is to produce more data and transparency.

How can investors, especially smaller ones, integrate stewardship into their investment strategy?

It is important to note that smaller investors can also effectively integrate stewardship into their investment strategy. To do this, it makes sense to join an investor pool at Ethos, ISS, Glass Lewis, Inrate, etc. This increases their clout and enables them to vote not only at the regional level but also at the global level. In terms of engagement, smaller investors can either join a pool and delegate their activities to a provider or they can take a specific issue on themselves, for example by working together with Climate Action, Nature Action or FAIRR.

These strategies enable smaller investors to make a significant contribution to stewardship and make their investment strategy more sustainable.

What tips do you have for investors who want to start practising stewardship for the first time?

For investors who want to start practising stewardship for the first time, it is advisable to combine voting and engagement from the outset. Particularly at the beginning, support is needed to set the ambitions and goals and, if necessary, to select the optimal partner. However, the decision as to whether voting and engagement should initially take place only in one’s own country, in Europe or at the global level must be made individually. If you outsource everything, you can keep it very lean and don’t need any additional resources. The workload would then be roughly equivalent to a 20-50% position, with a more intensive period during the voting phase in the first half of the year. However, if you are particularly serious about it, you need one or two dedicated resources to continuously manage the topic.

How can companies better address investors‘ expectations in the context of stewardship?

Three points generally apply:

• It is important that companies with which dialogue is initiated understand that stewardship is not only a matter of compliance, but also an opportunity to create long-term value.
• Companies should strive to create a culture of sustainability that is embraced by all employees.
• The use of recognised frameworks and standards helps companies to create a transparent structure and processes and to document them.

There are indeed companies that proactively approach their investors and initiate the engagement themselves. However, if companies are approached by external investors, the discussions should be conducted seriously and well prepared. It is important that agreements reached are adhered to and that progress is regularly reported. Companies could also engage in more proactive dialogue with each other to share best practices in sustainability. The goal should be to be among the best-practice companies in the respective industry sector, so that they no longer lag behind in terms of sustainability. Companies that can demonstrate sustainable business practices not only improve their reputation, but also receive investments from sustainability-oriented investors. They are included in sustainability indices and become preferred companies for sustainability funds.

Marion Ehringhaus

Please read also the first part of this interview with Marion Ehringhaus