The need to improve the relationship between pension schemes and asset managers in implementing ESG targets is at the heart of a new report by a steering group established by the Investment Association (IA) and the PLSA.
The report, which focusses on pension funds as the dominant asset owners in the UK market, criticises that stewardship efforts by asset owners and asset managers are often disjointed and lacking long-term focus.
It builds on the work of a joint steering group set up by the PLSA and IA last year to align stewardship expectations between asset managers and owners.
While the report recognises the introduction of the Stewardship Code in 2020 as significant progress, it also criticises asset owners for having underdeveloped stewardship policies or treating them like a “hygiene factor”, rather than an essential element of the selection process. Asset owners too often focus on short-term performance in the investment progress, rather than adding long-term value.
Asset managers in turn are in the firing line for low levels of consultation with clients when setting up stewardship policies and for a disconnect between stewardship policies and investment objectives. They also stand accused of a lack of disclosure on their voting policies.
Create value
The central theme of the report is how to effectively address stewardship in the asset owner-asset manager relationship. In so doing, it sets out a guide for both sides to follow to create value.
The report suggests that asset owners and investment managers should “embed stewardship” in every aspect of their relationship and ensure this is borne out through a culture and commitment to prioritise sustainable, long-term value creation.
This should start with a clear articulation of joint stewardship priorities by both sides, prior to appointing a manager. Asset owners should also embed long-term targets into the relationship with the asset manager.
Asset owners who outsourced stewardship to asset managers should nevertheless ensure that the implementation is aligned with their own priorities.
Co-chair of the steering group and Zedra (formerly PTL) client director, Richard Butcher, said: “Stewardship is essential to building long-term value. It is important because it is part of ESG that can actually fundamentally shift the dial in terms of investing for good. If we can converge on a set of behaviours that are going to drive that good, and we can agree what those set of behaviours are, then we can influence the way companies operate.”
Agreed framework
One way to address this could be the creation of an “oversight framework” agreed on by asset owners and investment managers which brings together a performance review cycle, investment and stewardship objectives, as well as key performance indicators, the report says.
This is needed so that collaboration across the investment chain effectively addresses “the myriad of sustainability challenges” and market-wide risks.
This is one area where the group is attempting to instigate cultural change in the owner-manager relationship: as this approach differs from the current norm, which is based on more of a transactional style of relationship.
Under the spotlight
As things stand between asset owners and managers, the group does not hold back in its criticism, dishing out some warnings to both groups, offering an indication of where problems exist.
It cautions that investment managers “should be more proactive” about engaging with clients on their stewardship priori- ties while developing products and services to meet the demand for effective stewardship.
This is a suggestion that some asset managers are failing in this regard. It also puts asset owners under the spotlight, stressing an impetus on owners to contribute to the owner-manager dynamic in a more transparent way.
A key focus for owners should be on ensuring their “stewardship expectations are articulated clearly in the investment selection process” – with an underlying assumption they are failing to do so – and thereby creating alignment at the outset of the investment relationship.
When it comes to pension funds, trustees have an important role to play in that they should already have undertaken the necessary legwork to identify their stewardship policies as set out in the fund’s statement of investment principles.
“Consultants and advisers also have an important role to play and help trustees and asset owners to form their stewardship approach and then find managers that are consistent with those stewardship objectives,” Butcher said.
Investment chain
This is part of an on-going challenge. “The reason we set about doing this work is that the approach to exercising stewardship was incredibly fragmented,” Butcher said. “Trustees and asset owners may have had a stewardship agenda but there was no link up with their advisors or their fund managers. So we want to have stewardship running through the middle of this process like the writing in a stick of rock.”
Comments