From obstacles to outcomes: Enhancing effectiveness in stewardship and engagement

Read the full White Paper.

‘More activity’ appears to have become the dominant narrative in investor stewardship and engagement in recent years as the practice has entered the mainstream. In WHEB’s view, this misses the point. Instead, there should be a laser focus on ‘more effective’ stewardship and engagement that fulfils its purpose in delivering long-term value for clients.

We have felt this sentiment acutely in recent years. The rapid evolution of the ‘stewardship ecosystem’, has accentuated existing obstacles to effective engagement, as well as introducing new ones. Quite rightly, concerns about ineffective engagement have raised questions as to asset managers’ ability to deliver client value for money. They also give weight to apprehensions that sustainability investing does little to change firm behaviour.

In our white paper, to be published at the end of October, we seek to set out the root causes of these obstacles as well as highlight practical solutions employed by WHEB and other practitioners, and outline how we at WHEB aim to deliver long-term client value though stewardship and engagement practices.

1. Consensus on the fundamentals

There is wide agreement within the industry on the fundamental purpose of investor stewardship; to support long-term economic, social and environmental value¹. Beyond this essential role, however, there is much less consensus on the underlying elements. For example, there is not yet agreement on how or even whether stewardship and engagement should be linked with the mandate behind a given investment strategy. To be legitimate, it would seem to us essential that this link is recognised and communicated. At WHEB, we set out high-level objectives for our engagement activities. These then cascade into specific company-level engagement objectives that are linked to real-world outcomes. Achieving these outcomes, in our view, should shape our investment conviction in the stock and ultimately help create long-term value for clients.

Where engagement practitioners do agree is that engagement activity is complex, hard and often takes a long time. But what an ‘engagement’ actually is, and how effectiveness is assessed is still open to vigorous debate. We have our own approach at WHEB but clearly there will need to be some level of standardisation on these points if the engagement community is to realise its potential for delivering positive change.

2. Unlocking long-term value amidst resource constraints

As stewardship and engagement has become a more prominent part of asset managers’ activities, so the level of resourcing required has increased. But not all engagement is effective. Better targeting of engagement through a clearer focus on materiality would help. Being selective in this way also frees up resources to be more efficient. As an active manager, our approach at WHEB is to embrace issues that we believe are likely to be material over a long investment period. Engagement activity is also typically led by the investment team, enabling the issue to be placed in the context of wider commercial pressures and explicitly aligning our interest with that of the business.

Other styles of investment bring different strengths and priorities. Passive managers, or large diversified asset owners, for example, may not have in-depth knowledge of underlying assets. A focus on outcomes might therefore be better served if these organisations address broader market-level issues, such as improving asset-level disclosures or helping to shape public policy.

3. Demonstrating effectiveness and ensuring alignment

In its current form, engagement reporting is both resource-intensive and limited in its utility for clients wanting to evaluate effectiveness.

Challenges associated with attributing outcomes have (mis)directed the industry to focus on the data that is available – activity metrics. These metrics are most useful when linked to the outcomes being targeted. The purpose of engagement reporting is not to demonstrate activity, but to show activities have contributed to improved outcomes. Asset owners should be wary of unintentionally reinforcing focus on ‘activity’ over ‘effectiveness’ though their inquiries.

Nevertheless, seeking direct evidence of causality may also be a red herring. More worthwhile are endeavours to demonstrate correlation, or even an active contribution, between engagement efforts and outcomes.

Key Performance Indicators (KPIs) play a role in this, allowing measurement of any outcomes arising following engagement. Their value is further bolstered where reported alongside case studies illustrating the connection between objectives, activities and outcomes in a cohesive narrative.

The way forward

Rather than being existential threats, we see these obstacles as growing pains symbolic of the rapid development in stewardship and engagement practices. We’ve sought to highlight three areas where the accelerated dissemination of best practice could reduce barriers to effective engagement. Our aim in producing the white paper is to contribute to this process and in so doing, help underline the important role that stewardship and engagement can play at WHEB and in the wider industry in creating value for clients, the environment and wider society.

Read the full White Paper.

¹ For example the Financial Reporting Council (FRC), International Corporate Governance Network (ICGN), Investor Forum and UNPRI all define the purpose of stewardship in this way.