The use of escalation by asset managers “is inconsistent and often ineffective”, according to ShareAction’s second guidance paper in its responsible investment standards and expectations series.
The series was launched to address the “critical issue” of asset managers failing to engage robustly with the companies they invest in.
The non governmental organisation, which reviewed stewardship and sustainability reports of 50 of the world’s largest asset managers, found limited disclosure on the use and outcomes of escalation.
Despite asset managers generally disclosing some elements, for example their voting activity, it said the report was unable to fully capture the breadth, depth and quality of engagement.
This strikes a “discordant note”, said Isabella Ritter, EU policy officer at ShareAction, as they will only have to check human rights and environmental harms in their own operations.
She added, “EU negotiators have missed a resounding opportunity for more transformative change. Despite strong support from financial sector representatives and civil society, EU policymakers, due to the council’s pressure, chose to exempt financial institutions from due diligence requirements when offering financial services to their clients.
This grants financial institutions a free pass to neglect human rights and environmental harms.”
Escalation, the report said, is critical as if firms do not act when their engagement is not working, firms will accept there is no consequence attached to them failing to respond appropriately to investor concerns.
“Unfortunately, the use of escalation is inconsistent and often ineffective [at asset managers],” commented Niall Considine, head of investor standards at ShareAction. “Further, disclosure of escalation is poor and therefore stakeholders cannot assess and compare how effectively asset managers are using this vital tool.
He added, “Our paper lays out a standardised framework for a more ambitious and consistent use of escalation tools, supported by improved reporting. We urge asset managers to adopt this framework so that escalation is more transparent and delivers better results.”
ShareAction said the framework would enable clients and other stakeholders to assess and compare how asset managers are using escalation tools.
It would also help companies understand how their strategic choices will affect their relationship with investors and how it might impact access to capital.
In addition, it will allow investors and other stakeholders to identify overlapping goals and common purposes, and other asset managers to be smore ambitious and use the escalation tools to guide companies onto a path that benefits people and planet.
© Markets Media Europe 2023
