Active ownership is the use of the rights and position of ownership to influence the activity or behaviour of investees. This can be applied differently in each asset class. For listed equities, it includes both engagement and (proxy) voting (including filing shareholder resolutions). For other asset classes (e.g. fixed income), engagement may still be relevant while voting may not. Whereas it used to be thought of as being most appropriate for active equity investors, passive equity investors increasingly engage with companies too.
Active ownership is a critical concept in sustainable and responsible investment. It reflects the principle that institutional investors, as part owners of companies should take those responsibilities seriously and actively engage with companies to fully understand their governance practices and their strategies for managing environmental and social issues, and encourage companies through engagement to improve those practices and strategies if they are not adequate.
When selecting fund managers, it is relevant for pension funds tofind out whether engagement is done across all of the manager’s assets. Also, if the manager outsources engagement to a third party, asset owners should assess the terms of the arrangement and the sustainability of the relationship. Asset owners should also have the same fundamental perspective on engagement regardless of whether an active or passive strategy is in question. When engaging through service providers, asset owners should ideally define the ESG topics to raise, as well as sectors to target and objectives to achieve. Asset owners should consider participating in the engagements they care most about and establish during the selection and appointment process how such arrangements will work.
The different means of practicing active ownership include:
Engagement:Engagement refers to interactions between the investor and current or potential investees (which may be companies, governments, municipalities, etc.) on ESG issues. Engagements are undertaken to influence (or identify the need to influence) ESG practices and/or improve ESG disclosure.
The information collected may then be used in investment decision-making or trigger further engagement with the intention of influencing corporate practice and/or performance on ESG issues. This can be done unilaterally or by collaborating with other investors.
Collaborative engagement:It is often the case that a single asset owner or manager represents a very small part of a company’s overall capital. A group of investors of the same standing will therefore tend to have a stronger chance of engaging successfully than one single voice. Collaborating with peers also facilitates the dissemination of best practices across the industry. Collaboration can be in the form of joint letters to companies, dialogues with policy makers, request for support on upcoming shareholder resolutions.
Policy Engagement:An emerging area of focus in engagement initiatives is “Policy Engagement” i.e. taking a systemic view and engaging with investees on how they respond and engage with regulators, government or quasi-government bodies on policy and ESG issues, such as climate policy. The objective is to influence or change the regulation or guidance on how corporations or capital markets approach certain ESG issues. Engaging on policy is broadly the same for both passive and active strategies.
Proxy Voting:Being a responsible, active owner requires investors to establish voting policies and actively vote all of their proxies according to their policies, based on full and proper review of all issues, and reversing past trends of voting with management on nearly all issues. They can also go further, by filing or co-filing shareholder resolutions consistent with long-term ESG considerations. Proxy voting is thus the process through which asset owners or their agents (fund managers of voting services) exercise their rights associated with owning company shares to vote on ballots relating to ESG issues (expressing approval or disapproval) at Annual General Meetings and Extraordinary General Meetings, or by proposing shareholder resolutions on specific ESG issues.
Active ownership is different to the other strategies outlined, as it is not used directly to make decisions on selection of stocks or other assets, but rather to agree on a plan of action for improvement / change by the company over time. However, engagement can lead to a decision to invest or divest an asset or alter the holding level in some cases.
Concerns raised with “acting in concert”: Some investors have interpreted regulations as restricting an investor’s ability to collaborate during engagement processes. Regulators have recognised this concern and for example the EU have clarified to its constituents the issues where investors can collaborate without being presumed to have acted in concert, and this explicitly includes measures to promote corporate social responsibility.
Similarly, in South Africa, a review by legal firm Bowmans, commissioned by PRI, found that collaborative engagement on ESG issues should not fall foul of investor regulations, provided that discussions do not include aspects of pricing or competition related information that might be considered as insider trading.
Case study from OMIG South Africa – A SOLUTION TO THE COMPLEXITY OF STEWARDSHIP
Regulation 28(2)(c)(ix),was promulgated in February 2011 and was ground-breaking at the time. South Africa was at the forefront of responsible investment development in financial services, punching above its weight globally. However, the ground-breaking regulation, despite supporting codes of best practise, has been lacking in implementation. Trustees did not historically use the provisions of the regulation to effectively hold asset managers responsible for incorporating ESG in their investment practices. The often conveyed reasons from trustees being:
- The scope of the regulation and the understanding of ESG matters being too complex;
- A lack of capacity and/or the cost of resources to implement ESG integration effectively themselves;
- The complexity of delivering a consistent stewardship outcome, particularly for Pensions funds with many appointed listed equity managers
The last cited reason means that the Pension funds often end up with a diluted stewardship outcome principally as a consequence of differing proxy voting decisions and lack of cohesive engagement. This is a missed opportunity for Pension funds given the growing body of academic and investment research evidencing that stewardship is key to supporting investment returns and strengthening the efficiency of the market (Dimson, Karakas and Li 2015 and 2019). Building a market system founded on stakeholder capitalism requires that pension funds discharge their fiduciary duty in relation to stewardship in a well-orchestrated and co-ordinated fashion. The opportunity for collaboration with other large asset owners means that even smaller pension funds can ensure their voice is heard.
Old Mutual Investment Group (OMIG) has brought an innovative Listed Equity Stewardship Service to the market to solve for some the complexities associated with stewardship. In partnering, the fund receives a simple and effective proxy voting solution and can also choose to collaborate with our other stewardship clients in engagement – at a company and market level. At its core the OMIG Stewardship service is focused on building a coalition of asset owners who want to meaningfully build a more resilient market place. As the OMIG Stewardship service grows, so does our partners ability to affect change in the market. Ultimately we see this as an effective solution to the complexity of stewardship.
Robert Lewenson, Head of ESG Engagement, Old Mutual Investment Group
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