On UK’s first Ownership Day, linking active ownership with long-term wealth creation – Executive Perspective
By Penny Shepherd, Chief Executive of the UK Sustainable Investment and Finance Association (UKSIF).
Today more than ever, investors are looking closely at a company’s sustainability performance as part of assessing the future value of that company. For example, over 1,000 investors, managing assets of some US$30 trillion, have signaled their intention to use environmental, social and governance (ESG) factors in their investment decisions by signing the UN-backed Principles for Responsible Investment.
The main driving force behind this changing investor attitude is an increasing realisation that sustainability factors can have a material impact on financial value. Just last month new research from Deloitte concluded that ESG issues and events often trigger a strong and immediate impact on stock prices. Another example is cited by the research team at WHEB Asset Management who point to the case of UK retailer and distributor Findel plc. Findel rebuffed shareholder engagements on business ethics-related risks in 2010, only to then suffer public controversy around its corporate accounting entries; leading the stock to lose considerable value, including a dramatic 12% fall in one day.
What’s interesting about the Findel example is that some active investors – who had been engaging as shareholders with the company to discuss this risk – withdrew capital from Findel before the decline. Their shareholder engagement had highlighted the upcoming risk and active ownership had helped protect value for some investors.
Ownership Day dawns
That is one of the reasons I am excited about the UK’s first Ownership Day, that takes place on March 12 this year. Ownership Day is a new national initiative to raise awareness of the benefits of active ownership strategies in investment management.
The need to encourage more long-term stewardship by investors was one of the main take- aways of the Government’s Kay Review last year, and is one of the drivers behind the UK Stewardship Code – a set of best practice standards for active ownership – which now has over 260 signatories.
Active ownership is in the interests of the owners of capital, the investment industry that manages it, companies and society because it encourages a greater focus on effective long-term wealth creation. However, despite developing awareness in the investment world that it can help protect and increase value, the number of clients that demand this investment strategy remains small.
Funds with voting and engagement strategies in the UK are worth at least £825 billion while globally they are estimated to be worth at least $4.7 trillion, according to the Global Sustainable Investment Alliance. That sounds significant, but it is only a small fraction of total global capital markets. It is not even the biggest strategy among the responsible investment community. The Global Sustainable Investment Alliance found that the size of the more traditional ethical strategy to exclude or ‘screen out’ stocks was almost double the size at US$ 8.3 trillion in assets. The strategy of ESG integration was also bigger than voting and engagement at US$ 6.2 trillion. Although there are some nuances to this data (for example, it includes US investors supporting shareholder resolutions but not those involved in shareholder engagements), the clear conclusion is that the pension funds, insurance companies, financial advisers and private investors that drive asset management often do not demand active ownership.
Benefits for the whole investment chain
Long-term strategic issues facing companies go beyond sustainability factors. Nevertheless, there is a growing realisation that ESG issues are increasingly of strategic concern as the world faces the very real threat of environmental limits and associated social change. A stronger focus on active ownership by investment managers should therefore support and encourage companies to tackle these strategic sustainability issues.
If asset owners at the top of the investment chain demand high quality ownership activities from their managers then the result should be not only better returns for them in the long-term and a shift in investment manager focus from quarterly returns but also increased support for better corporate management of sustainability risks and opportunities.
Find more information about Ownership Day.
This post originally ran on our Sustainability site.