Active ownership in 2023: an engagement blueprint in action
Kimberley Lewis from Schroders on active investing – why it’s important for investment performance, priority themes and what’s new for 2023.
As custodians of our clients’ assets, we have a duty to ensure that the companies we invest in are managed in a sustainable way. But what does that mean in practice? How do investment teams, clients and the sustainable investment team come together to influence holdings and drive positive change and why is it so important?
Why is active ownership so important?
Approached thoughtfully and with focus, we believe that active ownership can strengthen the long-term competitiveness and value of our investments and at the same time accelerate positive change towards a fairer and more sustainable global economy. We see it as crucial to delivering value to all stakeholders.
What do we mean by active ownership at Schroders?
We’re really talking about three things – dialogue, engagement and voting.
- Dialogue: These are fact-finding interactions where we’re getting to know the companies. Often they’re led by the research teams or individual fund managers.
- Engagement: This is where we aim to specifically influence change. It is important that we can articulate to clients the impact our engagement has had on companies and wider society so we focus on setting robust SMART objectives (i.e. specific, measurable, achievable, relevant and time-bound).
- Voting: Equity investments give shareholders a vote and we vote on behalf of many of our clients. The right to vote can be a “sweet carrot” or a “strong stick” and we use it strategically, tactically and pragmatically to drive the change we would like to see.
From climate change to modern slavery to auditing scandals, ESG issues are very broad. How do we decide what to engage on?
Launched in February 2022, Schroders’ Engagement Blueprint outlines our ambitions, priorities, approach and expectations, and we send these to companies ahead of voting season.
We have identified six broad themes for our engagements: climate change, human rights, diversity and inclusion, natural capital and biodiversity, human capital management and corporate governance.
We are proud our Blueprint was awarded ESG Engagement Initiative of the Year at Environmental Finance’s Sustainable Investment Awards 2022, and judges noted its “successful focus on outcomes as an integral part of the engagement process”.
One of the rewarding parts of our job is collaborating with our investment teams and the wider sustainable investment team and assessing the material ESG risks facing an investment. We draw on the insights provided by our own proprietary tools, as well as external sources such as corporate reporting, research and the news agenda. The goal is to assess and boost factors material to investment performance and the needs of our clients.
As reinforced by our Institutional Investor Study 2022, this can vary by region. Governance and oversight was the most popular engagement theme for two thirds of investors (64%), which is not surprising as it underpins all ESG themes and companies’ ability to address relevant risks. The second most popular theme was human rights (62%) – the impact companies are having on workers, communities and consumers, followed by climate action and transparency (61%).
Climate was particularly important for investors in Asia Pacific (65%) and the UK & Europe (64%) while human rights and governance came up top for North America (64% for both), and in Latin America human capital management came first (58%).
How does it work in practice?
Firstly, at Schroders our active ownership activity is really investor-driven. Engagements are not conducted by a siloed team sitting in a corner. Secondly, we speak with companies not at companies.
Our investors know their companies, have a relationship with the management team and usually speak to them regularly. They’re most often in the best position to influence change, so we work with them to accelerate and coordinate their activity.
Another key element of the active ownership team’s role is organising collaborative engagements, where we partner with external organisations and other investors to strengthen our collective voice on issues where we share a common goal.
We will generally escalate our activity where we have engaged repeatedly and seen no meaningful progress. This could mean voting against management or even divestment.
To give a few examples of active ownership in practice, in 2022 we continued to engage with Amazon on the issues of health and safety and workers' rights, and with around 500 priority companies over climate transition plans.
Schroders pre-declared its intention to vote for shareholder proposals relating to climate change at three oil & gas majors – Chevron, ExxonMobil and Shell – to encourage a faster shift towards net zero. This followed supporting similar resolutions at BP, ConocoPhillips, Occidental Petroleum and Phillips 66 earlier in 2022.
Meanwhile, Schroders has engaged with Amazon for seven years to improve the firm’s workers’ rights, and at this year’s AGM we pre-declared that we would vote in support of three shareholder resolutions on the issue.
We pre-declared that at Meta and Alphabet’s AGMs, we would vote in support of shareholder resolutions aimed at improving their approach to digital rights – including exploitative content, misinformation and privacy.
As for overall levels of engagement activity, we are focused on the increasing proportion of engagements that are seeking to drive change. It is not just about volume. The diagrams below give an idea of how engagements broke down in 2021, with full figures for 2022 due in the spring.
What’s new for 2023?
We have updated our Blueprint and expanded on our expectations of companies. In a landscape of constant change – whether through new regulations, data, government action or research – we cannot stand still.
The main changes for 2023 include a greater focus on the Just Transition, increasing our expectations of companies over biodiversity loss and natural resource constraints, outlining our approach to shareholder resolutions with a new Shareholder Resolutions Framework and outlining our efforts to make impact-focused engagements.
Our increased emphasis on tackling harmful deforestation is in response to our own research, evolving market guidance and firm-wide commitment on this issue. For example, in 2023 we are developing our deforestation engagement strategy which will support our commitment to end agricultural commodity-driven deforestation by 2025.
We will continue to review our priorities as our understanding of material issues and market best practice evolves to make sure we are pushing for meaningful outcomes and change.
Kimberley Lewis is head of active ownership at Schroders. This article first appeared on the Schroders website.