<font color="#ef1c54">Financial stability on a prosperous planet</font>
Paul LeeHead of Stewardship and Sustainable Investment StrategyFind me on LinkedIn
In financial services, there are many homonyms – words with multiple meanings – and one that’s often used is ‘legacy’.
We talk to clients about passing on wealth or leaving the planet in a fit state for future generations – leaving a ‘legacy’.
Meanwhile, wealth and fund managers often use ‘legacy’ to refer to an existing client, where the service delivered to them isn’t in line with where they want to go as a business. This has less positive connotations, and I find this use of the term jarring because these are real people with assets our industry must still continue to care about.
For example, we speak to a lot of wealth managers who offer ‘conventional’, ‘ESG’, or ‘sustainable’ portfolios. Many ‘legacy’ clients are in ‘conventional’ portfolios, either due to disengagement, choice or tax reasons. But we’d argue that assessing ESG risk factors and active stewardship are baseline expectations in today’s market – no ‘conventional’ portfolio should be without ESG characteristics.
So, how can we, as an industry, bridge the gap between these two meanings of ‘legacy’?
When thinking about our legacy and how we preserve the wellbeing and wealth of our people and planet, we must consider long-term, systemic risks – like climate change. Only by doing so can we deliver long-term returns for our clients across their portfolios.
Financial stability on a prosperous planet
When it comes to managing such risks, we believe that stewardship is one of – if not the – most powerful tools we have to ensure our legacy is one to be proud of.
What is stewardship?Put simply, it’s a means of making sure your seat at the proverbial table is used to its full force. Effective stewardship takes a two-pronged approach:
Engagement: Discussing ESG issues with companies or fund managers to improve their handling, including disclosure, of such issues. This can be done individually or in collaboration with other investors.
Voting: Formally expressing approval or disapproval through voting on resolutions and proposing shareholder resolutions on specific ESG issues.
Fund managers have direct dialogue with the companies they invest in and, in doing so, represent the voice of their many underlying investors. For asset owners, including wealth managers, the role is not to engage with underlying companies directly; instead, it’s to have an active conversation with fund managers and to assess their delivery of stewardship on the ground – both in terms of voting and engagement.
Why now?It’s estimated that between now and 2027, there’ll be a £1trn intergenerational wealth transfer in the UK, and this figure is set to increase to £5.5trn over the next 30 years.1 Therefore, investing assets in line with the time horizon that will matter to this younger generation has never been more crucial. And that requires consideration of the systemic risks that affect our clients’ financial prosperity, as well as the prosperity of our planet.
We’ve seen a growing trend for sustainable funds, with the number of such products available in the UK up from 46 in 2005 to a whopping 167 in 2021.2 Still, the traditional approach of excluding non-climate-friendly and socially questionable industries simply passes the problem onto others. Such a blunt tool can often ignore the transformative powers such companies can hold in driving the transition to net zero. And, in some cases, this approach can also significantly harm investor performance, as illustrated by the repricing of fossil fuel assets amid the Russian war in Ukraine.
On the other hand, stewardship offers the opportunity for clients to remain exposed across the economy – benefitting performance – while simultaneously driving the real-world change required to help shape the future economy. Every company in the economy will need to transform and decarbonise its business over the coming years; investors can only protect their clients’ money through this transition by being active and involved stewards of those companies as they navigate that difficult process.
Seeing the wood for the treesIn a typical global equity fund, a fund manager may take positions in c.1000 companies. Each company might have around 15 resolutions a year (this number is primarily driven by local law and therefore varies a lot between countries). For wealth managers to effectively hold their chosen fund managers to account, they must be able to look through the weight of voting activity (often tens of thousands of individual resolutions across a suite of portfolios) and focus the discussion on the issues that really matter to end-clients, at the companies with the greatest risk exposures and to which they themselves have the most significant investment exposure.
Why is this important? Well, if you have funds voting on the same resolution in opposite ways, you’ve diluted the power of your seat at the table and made zero impact. Worse still, if you run sustainable portfolios, do you know whether your chosen fund managers are voting in line with your portfolio objectives?
As the saying goes, nothing worth doing in life is easy. But there are ways to collate, analyse and act on the available voting data, turning that data into usable and useful information. Through harnessing this information, we’ve found it possible to influence fund managers’ approaches, applying close analysis and carefully argued calls for change and improvement.
The numbers involved in making sense of engagement activity are lower – though our analysis of stewardship code reporting3 revealed that some managers are claiming many thousands of individual engagement actions. But the differing ways in which engagement is reported, including the different levels of detail provided – and most importantly, managers’ tendency to tell only the stories that put their activity in the best light rather than focusing on the companies and issues that matter most to their clients – mean that there’s a similar need to make sense of this reporting and refocus it on what’s material for asset owners.
Bridging the legacy gapContrary to some investors’ beliefs, it’s not necessary to sacrifice our planet's wellbeing for financial performance. Effective stewardship can help deliver real-world change while allowing clients to remain invested across the economy.
For wealth managers, having a more robust oversight of fund managers’ stewardship practices – and actively engaging with them to ensure clients’ views are heard – can help bridge the legacy gap so that all investors benefit, addressing the systemic risks that matter to your clients over the time horizons for which they’re investing.
Together, let’s shift the connotation of 'legacy' away from its current, rather negative use and towards the potential to leave better financial outcomes on a prosperous planet for generations to come.
Stewardship is one of the most potent weapons in our arsenal to leave a legacy we’re proud of. But effective stewardship requires wealth managers to look across tens of thousands of votes to focus their efforts on those that matter most to their clients, a challenging endeavour; it requires them to look across dozens of engagement actions, which are reported on by managers in very different ways. Our recently-launched Enhanced Stewardship Platform (‘ESP’) was designed to support asset owners and advisors in their stewardship efforts. It offers three modules:
For more information on our ESP, please get in touch and how we can support your stewardship activities, please get in touch.