Commentary: Asset managers need to work together to effect real change

Engagement has become the new battleground in ESG. Asset managers investing through a responsible lens now, in effect, compete on how they are influencing companies to act in line with their values. But are we now at a point where, on some of the planet's most pressing issues, asset managers should simply declare a truce and seek ways to collaborate even more beyond and within existing shareholder initiatives?

Engagement has come a long way in recent years and now sits at the vanguard of responsible investment. Gone are the days when "active ownership" meant a brusque letter to the company secretary — now engagement is a central feature of the approach of many asset managers, often involving responsible investment specialists, analysts and portfolio managers. Engagement policies and frameworks vary, but are becoming progressively stringent; some companies now face strict escalation protocols that can lead to divestment if objectives are not met within set time frames. Executive pay and corporate governance are increasingly being targeted, too, with some asset managers pledging to vote against boards refusing to set clear ESG commitments, targets and performance measures.

Policies such as these are demonstrably influencing company management, who cannot fail to be mindful that remuneration and even director renewal could be contingent on increasingly specific and ambitious demands. Asset managers are, however, moving at different speeds on engagement and voting, and do not systematically cooperate outside the existing investor initiatives and networks that agitate for specific outcomes and vote on their behalf. New initiatives by some asset managers to ask clients to vote their own assets can make sense for the most sophisticated clients, but also questions investors' capacity to apply pressure and limits the ability to bundle their influence. As a result, efforts to effect change are more fragmented than they could be, lowering the probability of achieving the outcomes responsible investors seek.

How did we get here? There is no doubt that the asset managers taking sustainability and other responsible investment themes seriously consider their ethical reputations to be competitive advantages. The more comprehensive engagement policies managers put in place to effect change, the more their credentials as leading responsible investors are burnished. There is nothing wrong with that — the more money invested with asset managers genuinely trying to wield their influence the right way, the better.

The problem is that engagement differs in approach, intensity and frequency from asset manager to asset manager, inevitably blunting the overall impact of their efforts. It is surely the case that more could be achieved if the leading investors with significant influence acted in concert. And would be a bit more transparent to create some public momentum. After all, on many key issues, engagement is the only tool capable of driving real change.

The reality is, of course, that we cannot feasibly expect a highly competitive commercial industry to suddenly become a benevolent club acting exclusively for the greater good. But the serious responsible investor players — the asset managers prepared to have difficult conversations with senior management teams and act with force if change is not forthcoming — could agree to take a more unified approach on the urgent structural challenges no single organization can hope to influence alone: climate change and biodiversity.

Inevitably, large-scale collaboration that goes beyond existing initiatives would not be straightforward, and suitable guidelines and frameworks would have to be put in place. Information sharing, for instance — a key component of any future effort to pool resources — would need to be tightly controlled. But why not create a system where the largest — and thus most influential — asset managers could, in exchange for sharing all their data on engagement efforts and management responses, be able to access everyone else's, held within a central database or information hub?

Engagement actions could be agreed between participants wherever possible to maximize pressure on management, forcing companies to confront a bigger and united group of investors demanding the same changes, commitments and improvements. If management failed to meet these demands, the group could vote against it as a collective. Ultimately, if voting did not result in the change desired, the group could threaten to divest as one, further focusing the minds of management while causing no relative disadvantage to the group's investors.

Clearly, this approach would be impractical to adopt on every issue. Engagements on shorter-term themes and objectives would remain the preserve of the individual asset managers, allowing each to differentiate according to their values. But ecosystem protection and global warming are surely long-term themes on which a consensus — and an aligned engagement and voting approach — can be agreed.

We know from our own increase in corporate governance engagements that companies are increasingly integrating ESG across their businesses, particularly in terms of climate. But we also know from emissions data and current pledges that it is far from guaranteed that the goals of the 2015 Paris Agreement will be met. We need companies to transition to pathways toward net-zero as quickly as possible. We need companies to demonstrate their willingness to change, to protect ecosystems and prevent deforestation, to help manage the carbon in the atmosphere and to stop our oceans and waterways from being clogged with plastic waste. More needs to be done on the biggest challenges facing our planet, and asset managers must work together to help make it happen.

Hans Stoter, based in Paris, is the global head of AXA IM Core, a unit of AXA Investment Managers that combines fixed income, multiasset and equities. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.