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7 essential reasons asset managers should be tracking ESG engagements in 2024

7 essential reasons asset managers should be tracking ESG engagements in 2024

Discover the seven key reasons why tracking engagements is essential for unlocking growth and positioning asset managers for success in the evolving responsible investment landscape.

Impactive Team
January 29, 2024

Environmental, social, and governance (ESG) factors have become integral considerations for asset managers and their stakeholders. With rising investor demand, evolving regulations, and increasing business impacts from sustainability issues, conducting and tracking ESG engagement are no longer optional.

Here are seven compelling reasons why formally tracking ESG engagements needs to be a 2024 priority for asset managers:

1. Achieve stewardship alignment with asset owners

Asset owners are doubling down on their sustainable investment commitments, and as many rely on their mandated asset managers to help them meet these objectives, they are increasingly scrutinising their managers’ stewardship policies to ensure alignment. 

One key example is the United Nations-convened initiative, the Net-Zero Asset Owner Alliance, which, in November 2023 published a report providing guidance for asset owners in setting and communicating about ESG goals with their asset managers. The report highlights the need for asset managers to adopt a “consistent, transparent, and outcomes-oriented climate engagement strategy, which recognises that climate change poses systemic risks to asset-owner portfolio returns”. It further states that such alignment of engagement outcomes “is critical for asset managers’ continued ability to win mandates of clients committed to net-zero.”

The UK’s Investment Association recommends greater alignment between asset owners and asset managers on ESG priorities. It argues that many asset owners need their investment manager’s stewardship policies to better reflect their sustainability principles.

Its report stresses that ongoing divergence hampers sustainable, long-term value creation. It advocates that asset managers consistently track ESG engagements across their portfolios. Doing so would help verify stewardship approaches match asset owners’ interests and ESG policies. 

Enhanced alignment would deliver clarity for asset managers on specific stewardship expectations. It also provides asset owners evidence that managers are undertaking engagements reflecting their priorities. Consistent tracking and reporting of ESG engagements is key to fostering this alignment.

2. Better manage and measure engagement outcomes

Tracking engagement activities is insufficient without measuring their actual outcomes. Because engagements can last months or years and often involve multiple stakeholders, high-quality progress and outcomes data is essential. This not only helps to surface any stumbling blocks but also provides rich insights into companies’ responsiveness to investor concerns. Tracking engagement outcomes helps investors to decide on which issues to escalate, provides context on how to vote at the next shareholder meeting, and provides clients with a clear understanding of the “so what” of any given engagement activity.  Alarmingly,  a recent survey by investment consultancy Redington found that only 22% of strategies overall provided portfolio-specific statistical data on the success of engagement activity.

So what are examples of engagement outcomes?

There are currently no prescribed metrics on what investors should be capturing as outcomes, but the UK’s Financial Reporting Council provides useful guidance in its Stewardship Reporting Review document. Outcomes can be both qualitative and quantitative and can include: 

  • Whether an engagement has been successful or has failed.
  • Specific commitments by companies on engagement asks.
  • Actual metrics that evidence improvements relating to a specific engagement, such as changes in total emissions from operations or enhancements in board diversity. 
  • An escalation activity such as an open letter to the board, voting against management, filing a shareholder proposal or changing an investment position.

Capturing engagement progress helps to clarify the extent to which engagement drives change and where more scrutiny is needed. It allows asset managers to confidently showcase stewardship progress.

3. Mitigate greenwashing risks

The prevalence of greenwashing — when asset managers exaggerate ESG practices for marketing purposes — has elevated scrutiny from regulators and society alike. Substantiating ESG claims is therefore crucial.

The financial and reputational risks are very real. Just last year, investment firm DWS was fined $19m by the US Securities and Exchange Commission (SEC) for overstating the scale of its ESG integration into certain actively managed funds. 

In the UK, anti-greenwashing laws are set to apply later in 2024. The FCA consultation on the guidance of the ‘anti-greenwashing’ rule closed on 26 January 2024 with implementation set to start from 31, May 2024.

Tracking key engagement details can safeguard asset managers from greenwashing allegations by providing evidence of actions taken to integrate ESG and improve sustainable business conduct across portfolios. Whether engaging on climate risk, human rights violations or corruption, formal documentation helps mitigate greenwashing risks.

Moreover, strong governance frameworks must support tracking mechanisms to ensure data integrity and accountability.

4. Comply with expanding regulations

Various regulations now require asset managers to report sustainability practices and product profiles. These include:

  • Sustainable Finance Disclosure Regulation (SFDR) in the EU.
  • Sustainability Disclosure Requirements (SDR) in the UK.
  • Task Force on Climate-Related Disclosures (TCFD) Framework globally.
  • Voluntary Stewardship Codes globally.

Keeping systematic records of ESG engagements across portfolios ensures asset managers can efficiently meet necessary reporting obligations. Rather than scrambling for data, firms stay compliance-ready with the ever-evolving regulatory landscape.

5. Strengthen ESG integration

Dialogue with investee companies can provide fund managers with richer and more nuanced information about how material governance and sustainability challenges are being addressed. Engagement progress data and proxy voting history should sit seamlessly alongside other ESG and financial research for a more holistic responsible investment approach.  

When this data is brought together consistently and in one place, and engagement tracking is carried out to a high standard, it enables managers to:

  • Base investment decisions on more detailed and comprehensive data.
  • More confidently demonstrate ESG integration case studies to clients.  
  • Make informed future voting and engagement decisions.
  • Constructively engage with company leadership.

Taken together, this integration approach can help to optimise risk-adjusted returns while moving towards more sustainable capital markets.

6. Enhance stewardship reporting

With responsible investment and ESG stewardship now a top priority for asset managers, stewardship reporting is evolving from generic claims to robust, metrics-driven disclosures aligned with leading stewardship standards.

According to research, greater transparency measures can minimise information asymmetries between companies and investors, improving market efficiency and stability.

Formalised engagement tracking systems allow asset managers to improve reporting — clarifying policies, targets, key data and results to meet stakeholder needs, irrespective of whether concerning hard regulatory requirements or are based more broadly on stewardship and engagement actions. 

7. Foster cross-functional collaboration

Advancing ESG tracking and engagements requires breaking down internal silos between investment, client relations, sustainability and other teams.

Constructive, cross-functional collaboration enables accurate aggregation of engagement data, unified messaging to stakeholders and ultimately, impactful stewardship.

With interests aligned around ESG tracking and transparency, managers can pursue sustainability in a coordinated, consistent fashion.

To conclude

Ultimately, asset managers serve a vital role as stewards of capital. The investment decisions made shape corporate trajectories on issues as profound as climate change, human welfare and the sustainability of our economic systems.

Managers now face rising pressure from beneficiaries, regulators and stakeholders to direct finances in a responsible manner. Yet positive impact requires moving beyond good intentions to accountable, measurable actions.

Tracking ESG engagements hence provides transparency to earn sceptic’s trust. It builds the evidence to prove commitments drive change. 

Ready to start tracking?

Impactive’s stewardship management platform was purpose-built for high-quality engagement tracking and ESG integration. With its user-friendly interface, investment and stewardship teams can immediately get started.

Get in touch for a free trial today.

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