Environmental
factors top list of investor priorities

Environmental and corporate governance issues topped the list of biggest priorities for the UK’s largest investors – but stewardship engagement remains an area of concern, a report reveals.

EY’s inaugural report into
investor stewardship and engagement found
that while investors and asset managers were most focused on environment and
governance matters, they were less engaged on important areas such as audit,
corporate reporting, trust and reputation.

As a result, EY warned
asset managers and investors to ‘step up’ their level of interaction and
stewardship with the companies in which they invest.

EY’s report analysed how the UK’s top 30 asset managers and investors reported on and engaged with their investee companies, looking at 25 priority areas of stewardship including succession planning, culture and values, competition and climate change.

Climate change and
sustainability emerged as the highest areas of priority for investors and asset
managers.

Engagement with boards and
senior management included addressing companies’ carbon emissions, adapting to
climate change and resource scarcity; and preparing for physical climate risks.

The research showed that
multiple investors are applying ESG assessments to help take environmental
considerations into account when making investment decisions.

Some pension funds are also
actively engaging on climate risks, with at least one linking the real value of
its members’ retirement income to the state of the environment in which they
will be retiring, according to the report.

Corporate governance ranked as the second-highest area of stewardship engagement, with topics including executive remuneration, director independence, leadership composition, risk oversight and succession planning.

EY classified corporate
governance as a ‘developing’ area of focus.

On EY’s scale, one is
classed as ‘emergent’ activity with limited investor focus, and five is classed
as ‘leading’ where investor policy is clearly communicated and supported by
strong evidence of engagement. Corporate governance received an aggregated
average rating of 2.07.

The research found
significant disparities in the level of engagement between asset owners (score
of 1.10) and asset managers (2.56), concerning corporate governance, indicating
an opportunity for asset owners to increase their level of interaction and
better signal their expectations to investee companies.

For example, while numerous
investors evidenced policies and engagement around gender diversity of boards,
few demonstrated engagement around other dimensions of diversity such as
ethnicity, skills and tenure.

Audit and assurance received
a low stewardship priority score of 1.36, with auditor appointments receiving a
score or 1.50 and audit quality scoring 1.53.

However, EY said it expects
these scores to increase in the future as recent high profile audit failures in
the UK lead to heightened regulatory and government scrutiny.

Trust and reputation (1.08)
and corporate reporting (1.43) were ranked amongst the lowest scoring areas of
stewardship, with limited evidence of how investors are engaging with
businesses on these issues.

“Asset managers and asset
owners have a vital role to play in setting the standards expected from the
companies they invest in,” Hywel Ball, EY’s UK managing partner of Assurance,
said.

“While it’s encouraging to
see more engagement on issues such as climate change, the research shows
there’s a need for deeper dialogue between business, investors, and society on
other important issues such as supply chains, purpose, and trust,” Ball added.

Andy Griffiths, executive director of the Investor
Forum, said embedding
stewardship in investment processes requires more than effective code and
regulation, and needs commitment and innovation by asset owners and asset
managers.

“Given the
complex investment chain, a principles-led approach, which places the role of
culture and governance at its centre, is key to incentivising all parties to do
the right thing.

“In our
experience, neither investment approach nor style should impede stewardship
capability,” Griffiths added.