Portrait of Michael Baldinger

Michael Baldinger

Head of Sustainable and Impact Investing

It seems like common sense that companies that manage their environmental, social and governance (ESG) issues well, are in a good position to outperform competitors that don't. Investors are seeing the benefit of taking ESG into account. Now, many are looking for ways to become better stewards of their investments by helping companies improve their sustainability. Robust portfolio risk management and due diligence may involve investors engaging with companies in order to gain information and influence behavior.

This engagement can give investors a real understanding of the state of a company and its commitment to a certain strategy.

We find that large investors are eager to engage if they believe it can help improve performance. A large-scale study of asset owners conducted this year by Responsible Investor found that asset owners rank fiduciary duty and the risk of not taking ESG into account as two of the top three reasons for incorporating ESG into their investment management. Engagement can be a vital tool for meeting these goals.

Dialogue enables investors to monitor and, where necessary, seek to drive corporate conduct on issues that affect the long-term value of investee companies across asset classes. It is a way to build relationships, collaborate with company management and look to enhance performance on issues such as capital structure, corporate governance, climate change and human capital.

The stewardship function comprises both engagement and voting activities (in the case of listed equity) and means being active owners rather than passive traders of stocks. Rather than basing investment decisions solely on an analysis of a company’s reported results, investors who are stewards of capital, work with corporate management to improve long-term drivers of value. It is an opportunity for companies to demonstrate how sustainability approaches influence everyday business decisions, focus on engaging with investor audiences around metrics and commit to implementing tangible changes to proactively enhance financial performance. Investors can share their expectations of corporate management and encourage working practices that seek to enhance long-term value.

Why do these activities matter?

Investors have a key role in driving sustainability integration and stewardship is an intrinsic part of the investment process. It offers unique opportunities for innovation that may realize positive material change for companies and better long-term returns for clients while benefiting the environment and society as a whole. It is no surprise therefore that the role of stewardship is becoming increasingly important for many investors. According to the 2018 annual report of the Principles for Responsible investment , 90% of signatories have engaged with investee companies in listed equity and 70% in corporate fixed income.

But how does stewardship or active ownership differ from the traditional notion of activism?

Activists often feel emboldened to challenge a company's strategy in a more forthright way and they undertake public practices that may affect a company’s governance. The ultimate goal of the activist is often achieving high internal rates of returns in a short period of time. According to data from Lazard, a record USD 65 billion in capital was connected to activist campaigns in 2018, up from USD 62.4 billion the previous year, targeting 226 companies in 2018, compared to 188 in 2017.

Activists are often associated with a "renter" mentality versus an "owner" approach. This type of activism can be negative for the existing management, often imposing decisions on boards that may result in the sale of part of the company, the unseating of management, proposing new slates of directors and reductions in capital expenditure. In comparison, active owners are long-term shareholders, focused on sustainable returns. That said, activism can also be regarded as a force for good and bring about positive change particularly when boards are not performing in a way expected of them. Sometimes, activist and active owner interests align and collaborations are possible. Ultimately however, the distinction between activism and active ownership remains, and we view the approach of stewardship, with its orientation toward long-term collaboration with management, as a more productive and ultimately sustainable means of realizing shareholder value.