Active stewardship and supply chain management are topics that the asset owner and manager community is struggling with, said a recent panel on the topic – mostly due to a lack of adequate data. Nevertheless, strategies around engagement are beginning to emerge.
In the discussion, which took place last week at the ESG Investment Leader | Europe 2023 event, participants said they were seeing greater stakeholder expectations around evidence of stewardship actions. “ESG integration has been around for the better part of this decade, but strategies coming into effect will only be possible through stewardship,” said Cleo Fitzsimons, Head of Responsible Investing at Pension Insurance Corporation (PIC).
She added that the quality of stewardship plans had been “much better” than it was in the past, with companies now “more receptive to being engaged with” than they had been previously. “Sustainability and corporate social responsibility (CSR) are no longer confused, and we have supply chain case studies to demonstrate best practices around something like good stewardship.”
Other panellists included Helen Price, Director of Governance at the Church of England Pensions Board, Nimisha Sodha, Responsible Investment Lead at Just Group plc, and Gilles Moëc, Chief Economist at AXA – alongside moderator Arun Kelshiker, ESG Advisor and former Head of Asset Allocation and Portfolio Strategy.
Price said she was noticing “an elevation to objectives”, with organisations drilling down and identifying why they were engaging with their investee companies and suppliers, as well as what changes they were seeking to affect within a supply chain.
“Now, there is more focus on the wider picture. You need to look at
the activities of everyone you’re working with.”
“Historically we just would’ve covered the movement of goods, but now there is more focus on the wider picture – for example, cyber security, because it is all connected,” she said. “You need to look at the activities of everyone you’re working with and the companies to which you’re lending to ensure that the lent money is not at risk. There’s nuance, and it’s better understood.”
Kelshiker noted that the landscape around engagement was shifting as well due to recent developments such as Active Ownership 2.0, a framework for “more ambitious” stewardship by the United Nations’s Principles for Responsible Investment initiative (UN PRI). “There’s more of an outcomes focus,” he said.
Sodha said the critical shift, now, was one from issuer to supplier engagement. “We’re well-rehearsed in issuer engagement, and the same topics apply to suppliers and supply chains,” she said.
“We need asset owners and managers working together in partnership to engage and influence wider market participants – like clients, consultants, and other stakeholders. The biggest challenges come for smaller market player who then need to pool resource,” she said.
Sodha also mentioned the CDP’s (formerly the Carbon Disclosure Project) supply chain engagement programme, which helps investors better engage with their suppliers via sustainability reporting and data accessibility. This aim has been key because thorough, credible ESG data has long been a problem for the industry – a point that Kelshiker emphasised.
“Even the European Commission is worried about the imposition on the corporate sector that reporting on supply chains will have,” said Moëc. “This tells you that there’s still quite a bit of hesitation in this area,” he added. “It’s a self-fulfilling prophesy; companies are scared to report or don’t have the data to report, so they don’t report.”
“It’s a self-fulfilling prophesy; companies are scared to report or
don’t have the data to report, so they don’t report.”
Moëc went on to say that he was increasingly nervous about a “divorce between what Europe is doing and what the rest of the world is doing”. His main concern, he said, was that “instead of convergence, we’re working with divergence”.
The tentative solution was better, more transparent data and streamlined, comparative indices. “We need data providers and index builders to overcome this divergence, but I’m not sure we’ll get there,” Moëc added. “When you’re engaging with companies, to some extent you’re instilling fear. You don’t want to discover too late, via a controversy, that something bad happened.”
This was why his organisation implemented a ‘three strikes you’re out’ policy, he explained. “We focus on companies that just make it into this universe, and then we give them three years. At which point, if there’s no change, we divest,” he said. “We’re trying to elicit the voluntary disclosure of data.”
Sodha said one of the biggest challenges was learning to become comfortable with “grey” areas. For example, there was a lot of qualitative data that issuers put into the market, but the numbers only told so much. “Data quality scores need to be taken into consideration,” she said.
Price added that it was important to be mindful that “scare tactics” didn’t stop companies from reporting. “For instance, it’s concerning when certain companies report not finding modern slavery in their supply chain – when we would actually expect to find it there,” she said.
“It's concerning when certain companies report not finding modern slavery
in their supply chain, when we would expect to find it.”
She, too, emphasised the need for more robust and easily accessible data. “We need to build – and are currently working on building – public databases of knowledge.”
Price used the mining industry as an example, explaining that it was critical due to the many minerals needed to reach net-zero targets. “We need to make [the mining industry] fit for the future,” she said. “We need more investment in emerging markets, especially in technology around deep-sea mining safety, to deliver the industry to 2030.”
Moëc added that there was one key data area where government regulation likely would not be sufficient. “If you’re looking for information about the supplier of the supplier of the supplier of the supplier, some companies will always fall below the radar,” he said.
“It’s only the big corporates that can force some kind of disclosure and ask the right questions when they contract out. No government can substitute for actions of the corporate sector because we’re always under pressure from clients to do more.” Moëc said most concerning funds for investors with engagement plans were the ones on the “lower end” of the quality scale that escaped analysis. “[Those] you need to worry about.”
“It’s only the big corporates that can force some kind of disclosure
and ask the right questions when they contract out.”
Fitzsimons added that the questions of “who is controlling the audit?” and “how far do you go?” were top of mind for investors seeking to improve their stewardship – but rarely, if ever, had easy answers.
“Some of these issues cannot be tackled on a company-by-company basis,” said Price. “They need to be collaboratively tackled.”
When asked by Kelshiker in which industries they felt their engagement efforts would have the most impact, the panellists gave a variety of responses. They said, 1) the mining industry (Price), 2) whichever sectors had “the biggest gaps to fill” (Fitzsimons), 3) the financial industry (Moëc), and 4) the utilities and automotive industry (Sodha).
For investment teams at asset owners looking to improve their stewardship and engagement practices and futureproof their investment portfolios, these answers proved a hopeful point on which to end the discussion.
