ESG stewardship: how engagement and proxy voting can create sustainable value in asset management

Environmental, social and governance (ESG) factors have evolved from being a peripheral concern to becoming central to investment strategies. This shift is not merely about compliance or ethical considerations — it reflects a fundamental change in how value is perceived and created. Stewardship is at the heart of this transformation, offering a pathway to sustainable growth that benefits investors, clients and society.

The financial imperative of ESG stewardship

Asset managers are recognising that companies with strong ESG practices are better equipped to navigate risks and seize opportunities. This has led to the integration of ESG factors into portfolio management, not as a box-ticking exercise, but as a crucial element of financial analysis.

Stewardship — where asset managers engage with companies through participating at AGMs, meetings and correspondence to improve their ESG performance — has proven to be a powerful tool in enhancing long-term returns for clients. By encouraging companies to adopt sustainable practices, asset managers can mitigate risks related to environmental degradation, social instability and governance failures. For instance, companies that proactively manage their carbon footprint are less likely to face regulatory penalties or reputational harm, which protects the value of the assets under management.

The 2022 floods in KwaZulu-Natal are a stark reminder of the financial implications of environmental risk. The devastating affect of these floods on local businesses and infrastructure highlighted the vulnerability of companies unprepared for climate-related events. Asset managers who prioritise ESG considerations are better positioned to identify such risks and engage with companies to improve their resilience against future environmental shocks.

Beyond compliance: strengthening corporate governance

Stewardship in asset management goes beyond influencing a company’s environmental and social practices. It plays a crucial role in strengthening corporate governance. Strong governance is the foundation of sustainable business practices, ensuring companies are run transparently and with accountability to all stakeholders, not just shareholders.

Through active engagement and voting at AGMs, asset managers can drive governance reforms that lead to better decision-making and oversight. This might include advocating for greater board diversity, pushing for executive remuneration that aligns with long-term performance, or demanding more rigorous disclosure of ESG risks and strategies to mitigate those risks. 

In recent years, shareholder activism within the asset management industry has led to big changes in how companies approach governance. High-profile campaigns have resulted in the restructuring of boards, the adoption of more stringent energy management initiatives, and the dismissal of underperforming executives. Asset managers are using their influence to address some of the most pressing issues of our time, from climate change to human rights abuses. These changes not only enhance corporate performance, but also contribute to a more stable and equitable economy, aligning the interests of investors with broader societal goals.

The future of ESG stewardship in asset management

As ESG factors become more integrated into the fabric of the asset management industry, the role of stewardship will only grow in importance. 

Asset managers are no longer passive custodians of capital; they are active participants in shaping the future of the companies in which they invest. 

This shift reflects a broader understanding that long-term value creation is inextricably linked to the wellbeing of society and the planet.

For South African asset managers, particularly those focused on development and inclusivity, stewardship offers a unique opportunity to drive positive change, not only in the corporate world, but also in the communities that rely on it. By championing sustainable practices and holding companies accountable, asset managers can ensure that their investments contribute to a more equitable and resilient future.

In essence, stewardship in asset management is not just about protecting investments — it’s about shaping a better country and a better world, one engagement at a time.

Download the 2024 Sanlam ESG Barometer report

Now in its second edition, this annual report — researched by Krutham and published in partnership with Business Day — examines evolving ESG dynamics and how listed companies in SA and Kenya are enhancing environmental and social outcomes through their operations. Click here to download it.

•About the author: Kuhle Sojola is ESG engagement specialist at Sanlam Investments.

This article was sponsored by Sanlam.

_{Sanlam Investments consists of authorised financial services providers in terms of FAIS. Full disclaimer can be viewed on Sanlaminvestments.com.}