Strategies for Effective ESG Engagement: What Does Good Look Like?

Get insights on modern ESG engagement in this recap of a panel discussion hosted by Responsible Investor.

Verity Editorial Team
May 29, 2024

For asset managers, expectations to prove engagement on ESG issues are growing. Reporting requirements are getting more and more granular. All this added pressure comes at a time when stewardship teams are often stretched and under-resourced.

So, what does effective engagement look like today?

To answer that question, Responsible Investor gathered experts in the field, including Will Keuper, VP, Verity; Carlota Garcia-Manas, Head of Climate Transition and Engagement, Royal London Asset Management; and Bruce Duguid, Head of Stewardship, Federated Hermes.

Below is a summary of key excerpts from their wide-ranging conversation.

Watch the full discussion at Responsible Investor >>

Setting Clear Objectives

Good engagement generally sets up clear objectives, especially in the realm of climate, said Carlota Garcia-Manas, Head of Climate Transition & Engagement at Royal London Asset Management. “We want to see credible plans, not just commitments, that are broken down sufficiently.”

She said it’s important not to focus on one metric only. Isolating metrics like climate, emissions, and decarbonization may lose the bigger picture. Her firm is looking more holistically, considering business plans, remuneration scorecards, disclosures, capital investments, and assumptions, including the role of carbon credits.

I think as investors we need to come up with clearer ways of pinning down those objectives.

Carlota Garcia-Manas
Head of Climate Transition & Engagement, Royal London Asset Management

Integrating ESG Into the Investment Process

Agreeing that clear objectives are paramount, Verity’s Will Keuper added that a key challenge lies in managing vast amounts of data and then proving the effectiveness of their efforts. This involves automating data capture and integrating it into the investment process without burdening the investment team. “At the end of the day, the team wants to spend their time engaging. Not trying to find what they engaged on. They want to push the needle forward. Not talk about how they previously pushed the needle forward.”

Good engagement, said Keuper, often includes automating the ESG engagement process and integrating it with the investment team. Although not always necessary, engagement typically involves the investment team. For ESG integration to be genuine, it must be comprehensive. This can be straightforward for some firms but challenging for others.

It’s toeing that line between capturing data and going overboard to the point it's alienating an analyst. More than anything else, analysts and portfolio managers value their time and their process. If they're going to give up a part of that time, I think they need to understand, not necessarily what's in it for them, but why it's important.

Will Keuper
VP, Verity

From Keuper’s perspective, it’s about showcasing the materiality of ESG issues and their impact on long-term value. Providing clear examples, such as policy interventions or competitive advantages, can help bridge the gap.

Garcia-Manas added that engagement is also collaborative with her firm’s portfolio managers, who may have identified a potential blind spot or something worth investigating further. Her team helps evaluate whether they believe the portfolio manager is dealing with something material. From there, both sides collaborate on engagement, sharing all the techniques and tools that they have built over the years to be effective.

Related: 3 Reasons Why Funds Stumble Toward a Solid ESG Investment Process>>

Making the Most of Limited Resources

The panel also discussed the complexities of resourcing. How do you achieve effective engagement with limited resources? Garcia-Manas of Royal London Asset Management acknowledged that proper stewardship is time-intensive and requires a broad range of expertise, from corporate law to environmental and social issues. It’s vital to have professionals with diverse backgrounds and skills.

Bruce Duguid, Head of Stewardship at Federated Hermes agreed, adding that industry generally lacks capacity, particularly outside the top companies. Effective stewardship requires substantial resources and collaboration.

You need a lot of resources. We should not discount that many investment teams will do stewardship. It is an industry-wide challenge.

Bruce Duguid
Head of Stewardship, Federated Hermes

Attributing Engagement to Outcomes

All panelists identified the challenge of attributing or owning outcomes tied to any single firm’s engagement activities.

“It’s always the hardest part of the equation to explain,” said Duguid of Federated Hermes. “I think, for good reason, that there are many different investors in any one company. They often align, so no single investor can claim all the success — and shouldn’t.” Often, other forces are at work, he said, so teams just have to be careful not to overclaim. “It’s one [area] we need to have humility on.”

Verity’s Will Keuper added, “This is one of the hard parts … and one that’s likely to remain a moving target in the coming months and years … and that’s not a bad thing.”

Bottom Line

Many asset managers are still figuring out what good engagement looks like. By clearly defining outcomes, capturing the right data, and optimizing for your human capital — whether your investment team, stewardship team, or both — firms have a framework for tracking toward progress.

To hear the full panel discussion, including what traits make a good stewardship professional, how firms deal with greenwashing, and more, visit Responsible Investor >>

Start Making Headway With Your ESG Investment Process

Verity offers a purpose-built ESG engagement tracker that helps funds capture data, track the full engagement lifecycle, and streamline compliance and reporting. All in one integrated and configurable software platform.

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