Take Five: Balance of Power

A selection of the major stories impacting ESG investors, in five easy pieces. 

A stark message in Bonn underlined the tensions between electoral cycles and long-term sustainability.  

Climate “collusion” – Republican politicians faced off against US institutional investors on Capitol Hill this week, in the latest round of the war on ‘woke’ capitalism. Having published a report claiming “bullying” of members by the investor-led Climate Action 100+ (CA100+) coalition, the House Judiciary Subcommittee on the Administrative State, Regulatory Reform, and Anti-trust heard from investor network Ceres, shareholder advocacy group As You Sow and CalPERS – the US’s largest public pension fund. Ceres CEO Mindy Lubber opened her testimony asserting: “Climate change, water scarcity and pollution, and nature loss … pose material financial risks to investment portfolios, business operations and supply chains, thus to the long-term stability of our markets and the economy.” As a member of its global steering committee, Lubber was also representing CA100+, which insisted its members “act as independent fiduciaries, responsible for their individual investment and voting decisions”. The stated purpose of the hearings was to decide whether current laws are sufficient to “deter anti-competitive collusion” to promote ESG-related goals in the investment industry. A legal memo recently secured by the US Sustainable Investment Forum found that firms and investors acting in concert on climate risks “are not violating fiduciary duty and are at negligible risk for anti-trust claims”. Even so, the hearings could be contributing to rising outflows from sustainable investment vehicles, with investor behaviour in the US diverging from elsewhere. Among the evidence cited for reduced appetite was the closure of several funds by BlackRock, some sustainability focused, others – less so, including one targeting opportunities arising from remote working. But it’s far from clear whether the world’s largest asset manager has given up on sustainable investing, given its launch this week of a series of climate transition-focused exchange-traded funds.

Slightly right – The rightward shift of the European Parliament following last week’s elections has prompted divergent views on its implications for the Green Deal that MEPs spent much of the past five years constructing. Centre- and far-right parties swelled their presence largely at the expense of the Greens and the moderate liberal Renew grouping – albeit with voting outcomes contrasting vastly across member states. There is scope for this new cohort to weaken some measures that are still being finalised, such as the

“Ambiguous” Rules Restrict French Climate Stewardship

Corporate governance laws are limiting the ability to lodge resolutions, as pressure grows for greater transparency on voting and engagement by asset managers.

French shareholder resolutions on climate themes are being hindered by the country’s corporate governance laws, with the lack of voting clarity from asset managers also presenting obstacles. A recent report from think tank 2° Investing Initiative (2DII) on investor engagement with French firms’ transition plans found that regulations are limiting…

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The Long Game

Approaching his 20th anniversary in responsible investing, Rathbones Stewardship Director Matt Crossman reflects on the evolution of stewardship and highlights the power of collective action.

“Responsible investing can mean so much more than voting, but it can’t ever be less than that,” Matt Crossman, Stewardship Director at Rathbones Group, told ESG Investor as part of a conversation during which he reflected over his career. “The core responsibility of a sustainable investor is to use their rights and influence in the companies they own.”

And as a 20-year veteran in responsible investing, Crossman certainly has borne witness to just how far investor engagement can come.

“Stewardship is far more embedded and widespread as a concept,” he said. “Today, no one would argue that investors shouldn’t be conducting stewardship activities.”

A nascent sector

When Crossman joined Rathbones Greenbank Investments – Rathbones’ in-house boutique for ESG investments – as an ethical researcher in 2004, sustainability data wasn’t readily obtainable.

“Greenbank ran its own screening database and my job was to look after it, for example trawling through news sources, aggregating data, and uncovering granular insights on the UK’s largest companies and a few international firms,” he said. “It gave me a grounding in how companies work and their approach to sustainability.”

At that time, the Greenbank team wrote to FTSE companies every year to encourage voluntary disclosures. Crossman was involved in the letter-writing campaign, but recalled it “became obvious that we had influence back the other way”.

After taking on an engagement manager role in 2006, he became much more aware of Greenbank’s main clients, which were large charities, religious faith groups and celebrities. “Clearly, they wanted financial products more aligned with their values,” he said. “Having the long-term best interest of your underlying beneficiaries at heart is the basis of stewardship.”

The first annual general meeting (AGM) Crossman attended was Shell’s that same year, where Rathbones co-filed a resolution asking the oil and gas giant to do a better job on ESG risk management. “There wasn’t the big institutional buy-in [seen today], so we used the minutiae of UK company law to get Greenbank’s individual investor clients to co-file resolutions,” he said.

The engagement initiative had quite an effect, sparking off a debate in the UK around shareholder voice.

“We realised that not only do we have the financial stuff to think about, but also stewardship influence and voting rights,” Crossman added.

Governance Core to Stewart’s Emerging Markets Strategy

The sustainable fund consistently outperforms its benchmark while maintaining a low-carbon intensity, with focus on finding the right people to mitigate investor risk.

The central role that corporate governance plays in investment manager Stewart Investors’ Global Emerging Markets Sustainability (GEMS) Strategy has been underscored to mark the 15th anniversary of the fund’s launch.

The firm has been investing in Asia since 1988, and emerging markets since 1992. It first launched a sustainability strategy for Asia in 2005, followed by GEMS in 2009 – both of which were driven by client demand. In addition to Asia, the GEMS strategy has invested in Europe, Africa, and Central and South America, with investors including large pension funds.

GEMS targets the generation of long-term, risk-adjusted returns by investing in the shares of high-quality companies deemed to be well-positioned to contribute to, and benefit from, sustainable development. The strategy has US$1.7 billion in AUM, while Stewart Investors’ total AUM stood at US$18.6 billion as of 31 March.

“Corporate governance was at the centre of how we invest, simply because you have to if you’re investing in emerging markets and Asia over long periods,” Jack Nelson, Portfolio Manager and GEMS Co-manager at Stewart Investors, told ESG Investor. “Our average holding period is more than five years [and] the quickest way to lose clients’ money is to invest with the wrong people in emerging markets, as you don’t have the same protections.”

As such, the firm has been prioritising investments in high-quality companies with good corporate governance, resilient cash flows and solid balance sheets, Nelson explained.

“When things go wrong in emerging markets – which they very often do – our companies tend not to decline in value as much as others,” he added. “That’s been the bedrock of our approach for 30 years.”

Beating the odds

The GEMS strategy has generated an annualised return of 10% for the 15-year period through March 2024 for Stewart Investors, consistently outperforming the MSCI Emerging Markets Index which returned 7%. It has also beaten the index in 11 of 14 full calendar years between 2010 and 2023.

GEMS is currently invested in 53 holdings across a range of different industries, with the strategy holding shares in an average 30-75 companies at a time. Stewart Investors’ global team of