Written by Will Mace, originally published on NBR , Thursday 08 September.
New investor Stewardship Code gears up to launch
Code designed to encourage investors to engage with companies, rather than simply exclude them.
Investment managers and asset owners will soon be expected to adhere to a new stewardship code that aims to improve the level of engagement between investors and the companies they own, as well as promote greater transparency about that engagement.
Consultation on the final draft of the proposed New Zealand Stewardship Code ended on September 2, and it will be officially launched at the Responsible Investment Association of Australasia’s (RIAA) annual conference in Auckland on September 28.
It was recommended by the Aotearoa Circle partnership in late 2020, and subsequently championed by what is now known as Toitū Tahua: Centre For Sustainable Finance and the RIAA, and designed by an industry-led committee of investors, bankers, lawyers and consultants.
While the final code is yet to be unveiled, the core concept is to clarify the responsibility that investment managers have to support companies to deliver long-term value for investors, but also for New Zealanders more broadly, in a way that doesn't undermine the sustainability of the economy.
Such codes are commonplace overseas, with New Zealand modelling its one on the UK’s version, which came about as a consequence of an inquiry into the causes of the 2008 global financial crisis.
Large institutional investment houses were said by Lord Myners – the UK Labour government’s City Minister between 2008 and 2010 – to be “asleep at the wheel” as the banking and financial services companies they held stakes in proceeded to collapse.
The UK’s code was implemented in 2012 to promote engagement over corporate governance issues, and has more recently spread to environmental and social issues – which are even more prominent in the New Zealand edition.
The New Zealand code also casts its net more broadly than the UK code, applying to asset owners, asset managers and providers of Discretionary Investment Management Services (DIMS), where clients have given them discretion to make investment decisions on their behalf.
Investors have been accused in the past of being 'asleep at the wheel'. Illustration by Michael Hickmott.
Exclude or engage?
Such codes are at the centre of a debate around whether investors should simply divest from companies they do not align with, particularly in terms of environmental, social and governance (ESG) principles, or retain a voice by staying invested and pushing for change.
A stewardship code creates transparency and accountability for investors who say they are engaging on such issues.
“Quite simply, we're not going to be able to deliver on a net zero Paris-aligned economy by just divesting of a few fossil fuel companies,” said RIAA executive director Simon O’Connor.
“We actually need investors to be deploying capital in a way that’s supporting the strategies of companies that are shifting to a low carbon, Paris-aligned focus.
“Investors are going to have to be at the table and they're going to need to be telling companies through their engagement activities that they are supporting long-term sustainable strategies that will continue to deliver growth and value for the beneficiaries in New Zealand for decades to come.”
The draft code has nine principles which encourage investors integrate ESG matters into their investment decision making. They must design and implement policies to guide engagement, vote responsibly at shareholder meetings, and disclose the nature and outcomes of their engagement.
It also advocates for collaboration between investors in order to amplify their influence on ESG matters, not just with companies, but also with policymakers, index providers and standards setters.
The code is voluntary, and signatories will be required to “comply or explain” their non-compliance.
How much to disclose?
Several investment managers participated in the drafting of the code via an industry-led committee, including Jorge Waayman, manager of ESG Research at Harbour Asset Management.
Harbour Asset Management's head of ESG Research Jorge Waayman.
Waayman told NBR that the demand for funds focused on ESG issues and responsible investment means there needs to be some standards set for companies offering those funds.
“It's very easy for a manager to say that they're doing a lot of this engagement and voting, but unless you lay it out in a report that shows what some of your outcomes are and case studies of those activities, then it can be prone to a form of greenwashing.”
Harbour Asset Management’s founder Andrew Bascand told NBR last year that the fund manager only disclosed voting information to its own investors and he was not keen to change that policy. He cited the trade-off between disclosing such engagement and maintaining a deep engagement with companies which can be jeopardised through public airing.
But Waayman noted that Harbour does now publish its voting record for every company it invests in, publicly on its website, and has published the records going back to 2019.
It's very easy for a manager to say that they're doing a lot of this engagement and voting... it can be prone to a form of greenwashing.
A breakdown of Harbour’s voting shows the category it most often voted against in 2021 was ‘ratifying executive compensation’, including at the likes of Rio Tinto, as well as voting against election of directors.
Waayman said investors could still pick and choose how much they disclose on a certain issue or about engagement with a specific company under the code, as long as they provide a picture to investors of their voting and stewardship policies.
It's not about using voting disclosures to pressure companies in an "activist" way, he said, but rather reporting on outcomes retrospectively as a form of transparency for clients, he said.
Harbour is clearly supportive of the introduction of the code given its role as part of the committee developing it and believes it has "strong alignment with many aspects" of it and will "continue evolving our approach based on the code and best practice", Waayman said.
Transparency
Philip Houghton-Brown is another key participant in the code’s development, and is also head of investment solutions for Westpac NZ's investment arm, BTNZ.
He agrees that engagement can continue to be done privately between fund managers and companies, but that doesn’t preclude greater transparency into the kind of topics that are being discussed, by providing high level detail to investors.
BTNZ is working towards developing a level of transparency consistent with the code’s principles, he said.
The funds’ actions are governed by Westpac NZ’s sustainable investment policy, available on its website, which states policies relating to voting, engagement, escalation and industry collaboration, as well as exclusions.
Philip Houghton-Brown, head of investment solutions at BTNZ.
Maturing of responsible investment
Houghton-Brown believed there had been a maturing of responsible investment approaches in New Zealand, and the code’s implementation would only serve to push that forward.
“While the biggest focus for the industry for some time has been on negative screening, we believe that stewardship provides an important complement to exclusions.”
The aim is to give greater prominence and veracity to stewardship activities, said O’Connor, and he hoped there would be a range of early adopters when the code is finalised later this month.
“What we expect to see is, when the code is launched, there'll be some founding signatories coming in to report in alignment with the code, and we'll be expecting anyone signing up to the code will be providing a stewardship report within the first two years."
A committee will be formed to give teeth to the code, enabling it to refuse signatories who are not delivering in alignment with the code, and only those who can comply and meet the requirements of the code will be able to call themselves code signatories.
“I think it will help to distinguish, in the market, those who are making claims that are less able to be substantiated versus those investors who are really coming to terms deeply with leading practice examples and practices around corporate engagement.”
NBR is the media partner for the RI Aotearoa NZ 2022.
Will Mace Thu, 08 Sep 2022