Active Ownership

A pilot engagement was conducted on selected managers of equities portfolios in emerging markets. Some useful observations and takeaway points were noted:

• In general, active managers conducted bottom-up fundamental analysis, including an ESG assessment prior to investing. They also considered the value accretion opportunities from investing in “ESG improvers”, i.e. companies with attractive valuation where potential return would get a boost from expected ESG improvement. More importantly, ESG incorporation did not mean compromising on investment return. As demonstrated by one of the active managers, by selecting quality companies during the investment decision-making process, a portfolio’s investment return could outperform by more than 10% in 2021, and achieve a better ESG profile over the performance benchmark.
  
  
• As reported by some active managers, public ESG data for emerging markets could be outdated, and the low availability and poor quality of ESG data highlighted the importance of engagement with companies in these markets. In order to conduct informed ESG assessments of “focus companies” operating in the emerging markets, conversations to better understand the company fundamentals are essential and could not be replaced by the use of public ESG data alone. Active managers also found engagement to be useful for encouraging companies to adopt better ESG practices.

We reviewed the active ownership practices of a group of managers managing equities portfolios in advanced economies. The review also assessed the managers’ climate risk management.

The review found that, in general, the managers’ active ownership practices were acceptable. We, however, noted an exception whereby one manager had voted against the climate-related shareholder resolutions in most cases, despite the manager’s public pledge projecting itself as a responsible asset manager with distinctive objectives and targets in climate change. When queried about the apparent inconsistency between its public pledge and proxy voting practice, the manager positively responded that going forward, it would support shareholder resolutions that bring positive actions on climate change as far as possible. The manager believes that concerted efforts among shareholders can accelerate the transition to greener outcomes.

A group of selected external managers became the first to undergo the engagement programme that systematically examines various aspects of their ESG practices, such as their ESG assessment framework, engagement with investee companies, and work on proxy voting.  The exercise identified managers with questionable practices that necessitated follow-up action:

• We detected that a manager had room for improvement in its ESG framework, specifically in establishing a more systematic approach to assess investee companies. We followed up on this with the manager, which embarked on a company-wide review to implement a more robust ESG framework. In particular, the manager engaged an external consultant to provide advice in the ESG process, demonstrating the manager’s determination to expedite implementation of the improved framework. The manager also set up a new ESG committee comprising senior management, affirming both its commitment to ESG and the backing from its senior management of the endeavour.
  
  
• Having reviewed the voting practices of a manager, we identified areas for improvement in the manager’s voting policy and brought these up with its Head of ESG for review. Specifically, the manager’s voting decision was 100% in favour of the management’s proposal and deviated from its own proxy voting guidelines. The manager later undertook to enhance the company’s voting policy by incorporating the expectation that there would be greater involvement of its ESG team members and the possibility of voting against the management where governance issues are material.