Perspective

Podcast: What it means to be an active owner


Schroders’ Kimberley Lewis, Head of Active Ownership, and Tim Goodman, Head of Corporate Governance, discuss their approach to driving meaningful change.

You can listen to the full podcast by clicking the play button at the top of the page. You can subscribe to the Investor Download wherever you get your podcasts. New episodes drop every Thursday at 1700 GMT.

00:38 – Part one: What does it mean to be an active owner?

Vicki Owen: The annual general meeting season is drawing to a close. It’s the season when investors get the chance to meet the management and have their say in the running of the companies in which they hold shares.

In recent years some AGMs have been feisty affairs.

[Soundbites from some AGMs play].

On issues from climate change to executive pay businesses have come under pressure from shareholders to clean up their acts.

But while most of us have shares which are held on our behalf, whether we realise it or not, we don’t attend AGMs or vote on the way the companies in which we are part owners are run.

Instead that voting and engagement is entrusted to an asset manager such as Schroders. And the way investment companies vote on or influence company behaviour on our behalf is referred to as active ownership.

Kimberley Lewis, Head of Active Ownership at Schroders: So active ownership, simply put, is the process of influencing the companies that we hold. It’s important for a number of reasons.

VO: That’s Kimberley Lewis, Head of Active Ownership at Schroders.

KL: We think it's our responsibility as custodians of our clients' assets to engage the companies on core issues that we think impact long-term value and sustainability. So as a result we take a really close look at our companies, we monitor their ESG practices and we then engage them in order to improve their performance on ESG issues.

VO: ESG, or environmental, social and governance, issues span a diverse range of topics. Schroders’ active ownership team has priority themes on which it chooses to engage with businesses.

KL: So our priority themes are climate change; natural capital and biodiversity; human capital management; inclusion and diversity; human rights and governance and oversight.

VO: But engagement requires a blueprint. And for Kim, Schroders’ Engagement Blueprint, published ahead of AGM season this year, is about figuring out what is expected of firms in the short, medium and long-term, being transparent about it, and encouraging change.

KL: Using that [Engagement] Blueprint as a model essentially, we then have dialogue with our companies to understand where they are on these issues and particularly having a look at which issues or most material to each company. And once we've done that assessment we then engage them to influence them, to support them, to driving progress on our ESG priorities.

VO: As we touched on earlier, an important lever in Schroders’ engagement toolkit is its proxy voting ability. The partnership between fund managers and the active ownership team in all of this is very important.

KL: Absolutely. It's very exciting for us and something that you generally do not tend to see with asset managers, and particularly lately you've seen a lot of the engagement activity kind of being done solely by the ESG team or the voting team or the engagement team. But in our case we believe that in order to really achieve the scale necessary to achieve substantial outcomes all of our fund managers are actively engaged.

So we consider ourselves to have an engagement team of over several hundred people. The recent mandate set by the investment team that all fund managers and analysts have engagement criteria that's set into their objectives I think is evidence of how seriously this firm takes active ownership.

VO: But with so many people involved and so many potential issues to challenge companies on, how do voting decisions get made? That’s coming up in the next part of the show.

04:56 – Part two: How do voting decisions get made?

Tim Goodman, Head of Corporate Governance: So we are part of the active ownership team and we are responsible for the corporate governance of Schroders’ investee companies, in particular the governance of public quoted companies, and a big part of our role is voting at shareholder meetings.

VO: That’s Tim Goodman, Head of Corporate Governance. It’s part of his team’s role to collaborate with the various portfolio managers and analysts in the investment teams and other experts, such as those on climate, human rights and human capital.

TG: We start with Schroders’ voting policy and our approach to engagement in the Engagement Blueprint, and then through our knowledge of the company – through its disclosures, through the investment team's detailed understanding and our own engagement through the investment teams or the active ownership team – we begin to analyse the company's performance and formulate a decision.

And we often seek to obtain additional commitments from the company as part of that voting process.

VO: And, for the first time, this AGM season Schroders pre-announced how it was going to be voting on a number of shareholder proposals.

TG: Our clients are increasingly expecting us to do this at companies with high profile ESG concerns.

VO: The team’s activity includes tackling issues at big names such as Amazon and Meta, formerly known as Facebook. In particular it was their management of people.

TG: The shareholder proposals were on issues such as inequalities in health and safety, the working conditions at Amazon's warehouses and additional information on Amazon's freedom of association policy.

And at Meta we supported shareholder proposals including ones on enforcement of its community standards, the risks associated with its Metaverse project, supporting the publication of a human rights impact assessment and reporting on the measures it's taking to prevent online child sexual exploitation.

VO: Tim says that better information on these issues would help Schroders and other stakeholders better assess how these companies are managing important risks that may have serious financial, legal and reputational consequences.

But it wasn’t just big tech. Schroders also pre-announced voting intentions with many of the oil and gas majors.

TG: We supported shareholder proposals at Chevron and ExxonMobil, for example, to encourage them to move towards net zero greenhouse gas emissions on Scopes 1, 2, and in particular Scope 3.

VO: Scope 1 and 2 emissions are emissions from a company’s own operations – both those from its own direct use of fossil fuels and those from energy it has bought from the grid. 

And Scope 3 is the value chain emissions that that company is responsible for. And with oil and gas the biggest contribution to greenhouse gas emissions comes from Scope 3 emissions from the products that they sell, for example at the petrol pump.

TG: We also supported similar proposals at BP and Shell, but we also supported their current efforts on climate change.

VO: But how does an asset manager like Schroders make sure that its voting on strategic issues aligns with the priorities of its clients? And ultimately how does it demonstrate to its clients the outcomes that it’s getting through engagement? That’s in the final part of the show.

08:24 – Part three: Engaging with clients and measuring impact

VO: The challenge facing companies like Schroders is making sure that not only its voice as a corporation is heard but it takes into account the voices of its own clients and shareholders. It’s a difficult balance to strike with so many stakeholders with so many different views to take into account.

KL: So we are excited to see that there is more of an interest from clients on our engagement and our voting and actually how the companies that they hold are impacting society.

VO: Kimberly says that only two years ago a typical client inquiry might be about the number of companies the Schroders engaged with on the E, the S and the G. But now clients are much more interested in specifics.

KL: You know, what social issues are you engaged on, how are you engaging on, um, conflict minerals and the communities that they impact. And also much more specific questions around voting. They're looking at shareholder resolutions, particularly the higher profile ones and really interested in how we're voting on them.

So what we're looking to do in the future is one, make sure that we really actually understand what our clients' preferences are, where they stand on the issues. Our Engagement Blueprint is really a first step in that now that we've really kind of laid out our house view, which was done in collaboration with clients. We are going to be seeking for clients to very much be a part of developing that document as we do further iterations.

VO: However, the challenge for the entire industry is how to demonstrate the impact and outcomes of engagement activity. There are many events happening simultaneously that affect the outcomes for a company and the engagement period might be long, perhaps up to five years, and the result of many conversations and votes.

KL: What we want to do is communicate to our clients the journey that we are taking in order to achieve or to influence any particular company. What's also happening at the same time is that as there is more external interest in how we are engaging we are seeing things like assessments by external third parties or kind of rankings by looking at one individual indicator, whether it's a shareholder resolution vote, whether it's votes against directors on one specific issue or whether it's how we voted on a few selected votes. And then sort of using that as an indicator of how progressive we’ve been on ESG issues.

VO:
But Kim says that’s a concern. It shouldn’t be about just one indicator. There’s much more that goes into engagement than just a vote or tackling one specific issue. It's more nuanced, perhaps requiring many conversations, both public and private, to achieve the most influence and impact.

KL: So our challenge is to be able to very clearly articulate what we are doing, um, so that we can kind of push back against this drive we're seeing to boil down our actions into one kind of binary vote or one statistic, because you've really gotta see the full picture of all of our engagement activity. And that’s what our challenge is, to communicate that to our clients.

We absolutely strongly believe that the way to achieve the best impact is through combination of active stock selection, active engagement, and actively proxy voting, and that those three things really work together.

You can listen to the full podcast by clicking the play button at the top of the page. You can subscribe to the Investor Download wherever you get your podcasts. New episodes drop every Thursday at 1700 GMT.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.