MORE EFFORT NEEDED ON CLIMATE-CHANGE RISKS

There was a strong theme around avoiding any appearance of ‘taking sides’ with activist groups

TThere appears to be a pervasive overestimation by asset managers of their ESGrelated capabilities

wo recent surveys highlight the reality that local asset managers are failing to use their power to drive effective environmental, social and governance (ESG) practices in the SA market.

At the end of November 2021, RisCura released a report, Moving the Needle: Stewardship in SA, which focused on proxy voting and engagement by 52 privatesector asset managers, representing about R3.9-trillion in assets under management.

Two weeks later, my organisation, Just Share, released our own SA Asset Manager Climate Risk Survey, assessing the approach of 31 of this country’s largest asset managers to climate risk.

Some of RisCura’s main conclusions are that “stewardship practices are improving”, and that “managers rate their stewardship capabilities very highly”. Yet that report almost immediately throws cold water on its respondents’ self-assessments, when it says that “managers may rate themselves highly, but SA is falling behind”.

Our report found that while there are some encouraging signs of local asset managers adopting the necessary approaches to effective climate risk integration, relatively few of them demonstrate excellence when assessed against international best practice standards. In fact, many of the managers’ responses to us demonstrated a confidence in their effectiveness that was not borne out by their answers to specific questions on climate risk integration.

There appears, in other words, to be a pervasive overestimation by asset managers of their ESG-related capabilities, and insufficient assessment of whether engagement is having real-world impact.

In particular, it doesn’t matter how many “ESG engagements” a manager has with investee companies if those engagements do not result in positive shifts in corporate behaviour.

The fact is, we have not seen the kind of shifts one would expect to see if managers were as good at stewardship as they think they are.

There are few countries that have both a sophisticated financial market as well as the vast array of social, economic and environmental challenges that characterise SA. This means asset managers here have huge power to contribute to shaping a more sustainable and just economy — yet they seem reluctant to exercise this power.

In my view, there are two main reasons for this gap between the levels of ESG-related competence reported by asset managers, and their lack of impact in the real world.

The first is the widely acknowledged reluctance by asset managers to take public action to hold companies accountable.

The second, clearly demonstrated in the responses to the Just Share survey, is a widespread failure to set firm goals and timelines for engagement with companies, with specific trigger points for escalation if that engagement fails to result in behavioural change.

The responses to the RisCura survey are astonishing in their candidness about their preference for “behindclosed-doors engagement”. The report says that “managers don’t like going public, but a lot happens behind the scenes”. But very little evidence was provided that showed any causal link between those “behindclosed-doors” engagements and positive shifts in corporate behaviour.

This is unsurprising, when you consider that more than one respondent indicated that taking any public stance would “antagonise” corporate management, harm relationships and potentially have an impact on the share value of a company.

There was also a strong theme in the responses around avoiding any appearance of “taking sides” with activist organisations like my own.

We are expected to accept on faith that these private meetings between investors and management are changing the world. The same corporate ESG improvements (most of which, at this stage, relate only to improvements in disclosure of a company’s ESG impacts, rather than improvements in the impacts themselves) are attributed by each asset manager to its own engagement.

Most fail to recognise the role that other investors have played, and some take credit for shifts in corporate behaviour that have self-evidently occurred as a result of public activist pressure.

Needless to say, asset managers aren’t supposed to have cosy relationships with management. As stewards of other people’s capital, they should be tough when the circumstances demand it.

They should also be willing, when engagements do not show results, to take concrete steps to escalate the issue, like voting against director reappointments. When necessary, they should be willing to do so publicly, and collaboratively.

That is part of their fiduciary duty (in relation to which, asset managers say in the RisCura survey, rather alarmingly, that “much more clarity” is required).

Across the globe it is clear that institutional investors have the most impact when they collaborate in their engagements (with other investors and with activists), set clear goals and timelines for escalation, and have a carefully planned public messaging campaign to communicate objectives and maximise impact.

Up to now, unsubstantiated claims about the “robustness” of ESG integration might have sufficed to convince a relatively unsuspecting public that its money is being responsibly managed.

But as the climate, biodiversity and inequality crises escalate, and clients start to demand evidence that their investments are not making it worse, local asset managers will have to radically up their game.