December 5, 2019 | By: Hyewon Kong

Getting Engaged

5.5 min read

How money managers are using their shareholder clout to effect responsible change. 


Not so long ago, the investment industry largely considered responsible investing to be a highly specialized niche. Times have changed. Today, so-called ESG principles – short for environmental, social and governance – have dramatically risen in prominence, in both the business world and among investment managers. There may be no better example of ESG’s growing acceptance than a statement from the U.S. Business Roundtable in August, in which 181 CEO members, representing some of the world’s largest companies, declared that the purpose of a corporation was “to create value for all stakeholders.” That includes employees, customers as well as suppliers and communities and is a radical departure from the organization’s official position for more than 20 years: that a corporation’s purpose is to serve the interests of just shareholders.

As a new decade approaches, the focus on environmental, social and governance issues is only expected to increase, not just in official declarations from the corporate world, but also in the principles and practices of the investment industry. Part of the reason is the evolving legal and regulatory landscape. Yet, just as important is the evolving recognition that good stewardship and sustainable investing practices are crucial components of risk management and of asset managers’ duty to investors. As this trend continues, consideration of ESG factors and robust stewardship will no longer be “nice-to-haves” for asset managers – they will be table stakes.

To this end, an important milestone came in 2010, when the U.K. Financial Reporting Council released its Stewardship Code, outlining seven principles that fund managers investing on behalf of institutions such as pensions should adopt. The code established a “comply or explain” approach: while it doesn’t require compliance to its principles, it does require fund managers to explain why when they do not comply. Other jurisdictions have since followed the U.K.’s example. Japan adopted its own stewardship code in 2014, and the Investor Stewardship Group, a coalition of  U.S. and international institutional investors, published its Framework for U.S. Stewardship and Governance in 2017. 

The existing codes are largely concerned with ensuring managers have stewardship policies – for instance, on how they will discharge their responsibilities, on how they will manage conflicts, on co-operative action with other investors, and on reporting. Soon, however, a watershed moment in stewardship is approaching. In January, a new revision to the U.K. Code will come into effect, and it puts a stronger focus on the activities and outcomes of stewardship rather than merely policies. As well, it places emphasis on how investment and stewardship are integrated, including on ESG issues. And it mandates investors to explain how their stewardship policies apply across asset classes (publicly listed equities, fixed income, private equity and so on) and to investments outside the U.K. In today’s globalized investment landscape, the effects of the new code will be felt far beyond the U.K.’s borders. And, importantly, over the next decade it can be expected that other jurisdictions – including Europe, more Asian countries and Canada – will follow suit.

From a regulatory perspective, therefore, it only makes sense to be proactive in adopting policies and practices that conform to the trend. Yet the need goes beyond regulation. Research demonstrates that companies who are best-in-class or improving on ESG factors also deliver best-in-class returns over the long term. They tend to have a lower cost of capital, have lower long-term risk profiles and perform better on a range of metrics. Responsible investing and stewardship are not just window-dressing; they are increasingly going to be a key driver of an asset manager’s mandate to deliver outstanding returns to investors. And that means assuming a more active engagement model with the companies they invest in.


Climate change provides a good example of how these trends are playing out. All companies are exposed to climate change as a systemic risk; regulatory drivers (for example, carbon taxes) will affect corporate decisions on capital expenditures and planning, as well as the top and bottom line for companies in certain sectors, such as oil & gas. Increasingly, asset managers will have to ask and answer key questions about their role in addressing climate risk.

How do we engage with the companies we invest in on the issue? How can we assist those companies in managing the impact? And how do we incorporate consideration of climate change into our investment decisions?

On these and other issues, investor engagement will become much more important. For our part, we have adopted four pillars for investment stewardship. The first two concern our approach to ESG issues: first, research, analysis, and evaluation of these issues as a fundamental part of assessing the value and performance of an investment; and second, incorporate ESG into our risk and oversight at the portfolio level. The other two pillars, however, guide our interaction with the companies we invest in: active ownership, with proxy voting as a core component; and engagement, through which we dialogue with companies, policymakers and other investors to influence and promote ESG value-adding practices.

These stewardship pillars do not dictate how our portfolio managers must vote their proxies, but they do require them to comply or explain – consistent with the approach of the U.K. and other stewardship codes. After all, the level of awareness of ESG factors is not consistent across sectors or geographies, but our commitment to responsible stewardship means that often we will seek progress, not perfection. As well, we will continually assess the ESG performance of companies in which we invest, and factor our assessment into investing and stewardship decisions. And if we vote our proxy a certain way, we will explain the rationale.

This commitment is unwavering, but also evolving rapidly, not just for AGF, but the asset management industry generally. Responsible investing and stewardship no longer fall into the category of “niche” or “fad”; they are realities whose time has truly come.

Hyewon Kong is an associate portfolio manager at AGF Investments Inc.

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