Active ownership, or proxy and engagement, has experienced a growing role in investment practices in recent years. As the light continues to shine on the importance of responsible investing and the integration of environmental, social and governance (ESG) considerations, asset owners have a responsibility to better understand the risk factors and potential return associated with the ownership of a company they invest in.
At Russell Investments, we continue to ensure that engagement is a dialogue which is interlinked with voting practices. As a premier investment solutions partner with multi-asset and multi-manager capabilities, we leverage a broad set of relationships to exert influence and enable multiple levels of engagement. These connections also provide information sharing and serve as an important feedback loop into our active ownership processes.
I spoke to Kris Nelson (pictured above), director of Investment Research and Engagement Chair, to gain more insight into the significance of proxy voting and engagement and how we, at Russell Investments, are enhancing our practices. We believe, a robust active management approach can further enhance good governance to positively impact society and help to manage the long-term risk and reward for our clients.
Why is proxy voting and engagement significant to shareholders?
Proxy and engagement practices promote changes that protect and enhance shareholder value and shareholder rights. While proxy voting and engagement are two separate actions, these activities complement each other through an integrated approach. We believe that corporate engagement is an important step towards positive change, since it allows us to address outstanding issues directly with companies, which is why we continue to further enhance our engagement efforts.
How is Russell Investments evolving to meet higher expectations for active ownership?
At Russell Investments we continue to evolve our engagement practice to further our impact. In early 2020, we were pleased to add our support to the Climate Action 100+ initiative, an investor initiative to ensure that the world’s largest corporate greenhouse gas emitters take necessary action on climate change. In addition to supporting Climate Action 100+, we have partnered with Sustainalytics to further strengthen our integration of engagement, signing on to four key themes that involve 20 companies each. Our investment professionals will be active participants in the engagements that are coordinated by Sustainalytics.
Can you provide further details on the partnership with Sustainalytics, the four themes and what this means for our clients?
At Russell Investments, we believe that collaborative engagements can extend our reach and help to create a compelling engagement dialogue, which benefits both investors and companies. Moreover, we wanted to support our conversations with external research—this is why we have partnered with Sustainalytics. Through this partnership, we have endorsed the following four themes:
• Climate transition: While there are many ways to tackle climate risk, this theme is focused on steel and cement industries because they face significant emissions challenges but remain vital to global infrastructure.
• Japan: Engaging in Japan requires a deliberate and tailored approach. This theme is focused on mitigating material ESG risks identified via Sustainalytics’ risk assessment framework. We expect this theme to emphasise governance issues, such as board independence and accountability, because this is often a material issue for Japanese companies.
• Water management: Water risk and resource management is a key commercial issue for many companies, and this theme aligns with our focus on Environmental Stewardship.
• Future of work: Innovative and competitive companies must invest in human capital to stay ahead. This theme is focused on social risks and opportunities such as workforce and leadership diversity and the creation of fair and well-functioning labour markets.
We believe that each of these themes are supportive of our focus areas and of material importance to the investment landscape today. Moreover, beneficial progress in these areas are part of our philosophy as a business.
What criteria does Russell Investments use to determine whether a company is a good prospect for engagement?
We take into account the following primary criteria: past and current proxy items, ESG analysis (performed in house and by our third-party vendor of ESG metrics, currently Sustainalytics), Russell Investments’ ownership levels and regional diversity to support the breadth of our impact.
Furthermore, when deciding to engage with a company, we make a concerted effort to focus on the issues that we believe will have the most impact on shareholder value and rights. We organise our engagement efforts among specific categories: compensation, independence/accountability, diversity, environmental stewardship, climate risk reporting, and cyber safety. However, we continually review and adapt these focus areas to address emerging investment risks and opportunities and to respond to our clients’ needs.
What does a good or impactful engagement look like in general terms?
Engagement is not a single conversation and proxy voting is not merely a vote. When combined, proxy voting and engagement are two crucial tools for communication with corporate leaders, and this can help deliver long-term value creation for investors.
Many of the industries we invest in today have unique and complex circumstances and structure, so constructive dialogue that understands a company’s governance practice and encourages change rather than dictates a course of action is crucial so that companies can establish practices that benefit all stakeholders.
What does the future look like for active engagement and what role do you feel asset managers have to play in this?
There is a significant shift taking place in the investment world, which is changing the allocation of capital. The relationship between investors and companies is also changing, with investors wanting to incorporate ESG practices and understand the companies they invest in on a deeper level. Engagement is an intrinsic part of the process that deepens our knowledge of, and assurance in, the companies we invest in. The increasing trend of engagement is prevalent among the fixed income market practitioners, especially as they do not have voting rights. There are an increasing number of bond managers treating engagement as an ongoing dialogue with companies, to influence corporate behaviours and improve transparency.
Furthermore, the quality of engagements will be more important than the quantity. Companies are already struggling with an overpopulation of frameworks and guidelines, and as the level of engagement increases, companies could become overwhelmed by the outreach. A constructive and thoughtful active ownership approach is critical to avoid adding to the ‘noise’ and achieving meaningful change.
Asset managers will need to prioritise on the issues that matter most to them as a firm, as well as investors. It is essential for all firms and asset owners to take a considered approach to proxy voting and engagement, to build on and foster ongoing and trustworthy relationships with companies.
Learn more about our progress in advancing and implementing our active ownership in our 2019 Proxy and engagement report.
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