Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFA ESG 22 > Chapter 6: Stewardship and Engagement > Flashcards

Chapter 6: Stewardship and Engagement Flashcards

1
Q

What is stewardship? How is it exercised?

A

“Active, responsible ownership of companies or other assets on behalf of a long-term owner”

  • Approach investors take as active owners and to put fiduciary duty into effect
  • Process of intervention to make sure that the value of the asset is enhanced over time
  • Exercised via voting and engagement
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is engagement? Why is it beneficial and to whom?

A
  • Way in which investors put into effect their stewardship responsibilities
  • PRI Principle 2 - Active Owners and incorporate ESG into our ownership policies and practoces
  • Stewardship and engagement are beneficial because they enhance shareholder value and support investors in the execution of their fiduciary duty
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Which are the engagement dynamics that create value over time?

A

‘CLP’

  1. Communicative dynamics (exchange of information)
  2. Learning dynamics (enhancing knowledge)
  3. Political dynamics (building relationships)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the effects of engagement?

A
  • Successful engagement activity was followed by positive financial returns
  • ESG engagement leads to reduction in DOWNSIDE RISKS and the effect is stronger the more successful engagement is
  • Effect is strongest on governance
  • But engagement less successful on remuneration
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

How can engagement inform investment decisions?

A
  • Understand business adaptability
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the characteristics of effective engagement?

A
  1. Set in context of long-term ownership with focus on long-term value preservation and creation
  2. Based on good understanding of nature of company and business model drivers
  3. Recognized change as a process that takes time
  4. Employs consistent, direct and honest messages and dialogue
  5. Is appropriately resourced
  6. Uses resources efficiently
  7. Involves reflections and lesson learning
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are monitoring dialogues?

A

“Dialogue for investment purposes… to understand the company, stakeholders and performance”

  • Conversations between investors and management
    ○ Investment purpose to understand the company, its stakeholders and performance
  • Informs incremental buy/sell/hold decisions
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are engagement dialogues?

A

“Purposeful dialogue with specific and targeted objective to achieve change.. individual or collective”

  • Engagement dialogue conversation between investors and all level of investee
    ○ Purpose dialogue with a specific objective to achieve change
    ○ Two-way dialogue
  • Individual or collective
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the purpose of the UK Financial Reporting Council Stewardship code, what does it say, and what are important addition?

A
  • Clarifies distinction between roles of asset owners and asset managers
  • Role of asset owner is overseeing, challenging and assessing stewardship activities of asset managers
  • Revision of the code in 2020 includes twelve principles
    ○ Principles 1-8 address the foundations of stewardship
    ○ Principle 4 charges signatories with identifying and responding to marked-wide systemic risks
    ○ Principles 7-8 integrate ESG in investment process
    ○ Principles 9-12 focus on the practice of engagement and voting responsibilities
    — New area is focused on OUTCOMES

Principle FOUR (4) is viewed as most challenging as it charges signatories with identifying and responding to market-wide and systemic risks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

When was the Walker Report draft and what is its primary message?

A
  • After the financial crises
  • Called for stewardship code
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are commonalities in stewardship codes?

A
  1. Regular monitoring of investee companies
  2. Active engagement including escalation
  3. Thoughtful and intelligent voting
  • Some regulatory codes also required investors to manage their conflict of interest - but less common in codes by investor groups
  • Escalation should include willingness to act collectively
  • Usually focus on public equity investment
  • Shareholder rights directive II - likely lead to more stewardship codes in EU
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are differences in between E+S and G Engagement?

A
  • E+S Engagement arise from business activity, sector etc -
    ○ Engagement often focuses on sector as a whole
    and establish shared standards and best
    practice
    ○ Dialogue starts with investor relations and then
    escalated upwards
  • G is determined by business country’s laws and
    regulations
    ○ Focus more on individual companies
    - Start with the Chair
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the difference between active and passive investment and the role of engagement in it?

A

○ Active investment ->Bottom-up, company focused -> active investment
§ Start with company
§ TAILORED engagement approach cutting across
range of issues
§ Start with underperformers
○ Passive investment -> Top-down, issue-focused
§ Start with screening / Start with AN ISSUE
§ Seek to engage with all companies impact by
issue
- Starts with letter written to all impacted
companies, then dialogue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What operational challenges for engagement need to be addressed?

A
  1. Define the scope of the engagement and priorities of engagement
  2. Frame the engagement topic (climate etc.) into broader discussion around strategy and long-term financial performance
  3. Develop a clear process that articulates realistic goals and milestones
  4. The engagement process needs to be adapted to the local context
  5. Clear escalation measure in case engagement fails
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are the two priorities engagement has to consider?

A

○ Identifying which company in a portfolio is most in need of engagement
- Determining which engagement issue should be prioritized

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Who should investors talk to related to E+ S issues?

A

Often the IR team, escalation to the board

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Who should investors talk to related to business and strategy issues?

A
  • CEO and senior management
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Who should investors talk to related to governance issues?

A
  • The Chair
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Who should investers talk to related to voting issues?

A
  • Company Secretary or the IR
20
Q

When might escalation not be the right step?

A
  • Escalation might not be the right step if no progress has been made and the objective doesn’t warrant excessive activity
21
Q

What are common forms of escalation?

A

○ Holding additional meetings with management
○ Expressing concerns through company advisors
○ Meeting with Chair or other board members
○ Intervening jointly with other institutions
○ Making a public statement
○ Submitting resolution to speak at general meeting
○ Requesting a general meeting - and sometimes
change in board membership
○ Writing a formal letter
○ Seeking dialogue with other stakeholders
○ Legal remedies or arbitration
- Adding company to exclusion list

22
Q

What are key features and rules of collective engagement?

A
  1. Trusted facilitator, not an advisor
  2. Opt in/Opt out
  3. Complementary to member’s engagement
  4. Confidentiality
  5. Nominated key engagement contact
  6. Hub and spoke model
  7. No inside information
  8. Non-concert party and no-group
  9. Heightened procedure
  10. Conflict of interest avoidance
23
Q

Please describe the purpose of voting, when investors should vote?

A
  • Referred to as proxy voting because investors rarely physically attend AGM
  • Vote is a key tool for the active investor
  • Voting decision should align with the investment purpose and stewardship agenda
  • The vote itself is rarely meaningful in itself because there may be a range of reasons that an investor might have
  • Therefore, investors have an active program to communicate to company
  • Informal insights and benefits of actually participating in the meeting are of much value
  • Investors should vote not just on resolutions where they have a clear opinion
  • If investors are concerned about financial viability - they should vote on dividend issues
24
Q

According to PRI, what can asset managers engage on infrastructure projects?

A
  1. Use ESG assessment for due diligence process before acquisition
  2. Include ESG risk and opportunities identified during due diligence into post-acquisition process plan and into asset management activities
  3. Engage with, and encourage, management to act on ESG risks
  4. Define and communicate ESG expectation for operations and maintenance
  5. Ensure that ESG issues are integrated into asset level policies
  6. Advocate for governance framework that articulates ESG responsibilities
  7. Set performance targets , including reports to board and investors
  8. Make ESG information and expertise available to asset or project company
25
Q

What is the first key step in engagement?

A

Setting CLEAR objectives

26
Q

What is the main reason for collective engagement?

A

Enables greater EFFICIENCY

27
Q

Why was UK stewardship code amended?

A

Increased ambitipon for practical delivery by signatories.

Former focus on statements of intent no longer exists..

Investors expected to report annually on activity and OUTCOMES from activity

28
Q

What was the Investor Forum rabout?

A

Main goals of The Investor Forum:

  • Changed company behaviours
  • Efficient capital allocation by companies
  • Appropriate risk management by companies
  • Preserved/enhanced value
  • Delivery of corporate purpose and culture, through effective oversight
28
Q

What was the Investor Forum rabout?

A

Main goals of The Investor Forum:
CEAPD

  • Changed company behaviours
  • Efficient capital allocation by companies
  • Appropriate risk management by companies
  • Preserved/enhanced value
  • Delivery of corporate purpose and culture, through effective oversight
29
Q

What does the PRI’s guide to ESG Engagement for fixed-income recommend investors prioritise focus on?

A

PRI’s Guide to ESG engagement for fixed-income investors recommend investors prioritiise on:

LARGEST holdings with LOWEST credit ratings:

Prioritize engagement based on:

  • The SIZE of a holding in the portfolio
  • LOWER CREDIT QUALITY issuers (less balance sheet flexibility to absorb negative ESG impacts)
  • Key THEMES thatare MATERIAL TO SECTORS
  • Issues with LOW ESG SCORES
30
Q

What other codes around the world have been written following The UK Stewardship Code?

A

Global: - ICGN Global Stewardship Principles
Europe: European Fund and Asset Management Association Stewardship Code
Australia: Australian Asset Owner Stewardship Code
Brazil: AMEC Stewardship Code
Japan: Principles for Responsible Institutional INvestors
Singapore: Singapore Stewardship Principles
USA: Investor Stewardship Group Stewardship Principles

31
Q

How many principles did 2010 Stewardship code have?

A

7.
Revision in Jan 1, 2020 has 12.

(Plus an alternative six for service providers)

32
Q

From what ESG factor is reduction in downside risk the greatest?

A
  • Strongest related to governance, and effect is stronger the more successful ENGAGEMENT is.

.. then for social issues (as long as these are also associated with work on governance)

33
Q

Which UNPRI is the ‘ENGAGEMENT’ principle?

A

2
(2 ppl to get engaged)

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
PRINICPLE 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
Principle 6: We will each report on our activities and progress towards implementing the Principles.

34
Q

What are four engagement styles?

A

Top-Down
Bottom-Up
Issue-Based
Company-Focused

–

Top-Down: Working through board and down to management from there
Bottom-Up: Dialogure starts with investor relations or sustainability teams, and then escalated upwards, both to senior management and to the board level
Issue-Based: Starts with an issue, whether identified by team from news or broader analysis, or through a screening or other research provider, and then seek to engage with all the companies impacted by that issue
Company-Focused: Starts with the company itself and its business issues and develop a tailored engagement approach cutting across a range of issues

35
Q

What are four engagement styles?

A

Top-Down
Bottom-Up
Issue-Based
Company-Focused

–

Top-Down: Working through board and down to management from there
Bottom-Up: Dialogure starts with investor relations or sustainability teams, and then escalated upwards, both to senior management and to the board level
Issue-Based: Starts with an issue, whether identified by team from news or broader analysis, or through a screening or other research provider, and then seek to engage with all the companies impacted by that issue
Company-Focused: Starts with the company itself and its business issues and develop a tailored engagement approach cutting across a range of issuesWhat

36
Q

What methods can asset owners engage with companies?

A
  • Directly, through team members who act as stewards of the investment portfolios
  • Through external fund managers (through portfolio managers who take stewardship responsbility, OR)
  • Through stewardship specialists
  • Engagement can be entirely outsourced to specialist stewardship service providers
37
Q

Which part of principles of UK Stewardship Code may not be reflected globally?

A

CONFLICTS OF INTERESTS

  • Usually great consistency for principles globally, but conflicts of interest are dealt with differently

EFAMA Code (European Fund and Asset Management Association) almost copies UK version directly, except for the omission of CONFLICT OF INTEREST section

38
Q

What is the best way to measure success of engagement?

A

Measured by how well did it deliver pre-agreed objectives

Financial success in business performance and stock performance may consequently occur, but is always subsidiary to first measurement of success

39
Q

What are the dominant proxy firms used by institutional investors?

A

Glass Lewis & ISS

  • ISS has 80% of market
  • Glass Lewis has most of remaining 20%
40
Q

What are the legislative challenges hindering collective engagement of individual investors?

A

CONCERT PARTY RULES

  • Collective engagement issue is controversial as there are concerns about creation of concert parties (groups of shareholders so influential that they in effect take control of companies without mounting formal takeover)
41
Q

How is ESG engagement approached for sovereign debt?

A

Uniquely.. stewardship interaction is likely much more limited.

Only largest investors are likely to have any scope to influence stance of nation states, and even then, influence is likely minimal..

ESG approach applied in this asset class is ‘SCREENING’ or ‘ESG TILT’ in investment process, rather than engagement..

42
Q

NEW UK Stewardship Code sets out list of escalation measures in principle 11 .. but former UK Code set out helpful list of escalation measures that can be considered to advance engagements.

A
  • Writing a formal letter setting out concerns, usually to chair
  • Letters are usually private, but may be ocassionally leaked publicly if frustrations worsen (sometimes leaks come from within company, if there are internal individuals who are frustrated by lack of progress)
43
Q

Which regulatory body is responsible for enforcing Stewardship Code?

A

Financial Reporting Council (FRC)

Walker Report formalled called for FRC to issue stewardship code to provide framework for shareholder engagement

Code to be reinforced by Financial Services Authority (FSA, now FCA; Financial Conduct Authority) requirement that any registered fund manager must make a statement as to whether and how it approached its principles

44
Q

Steward’s primary goal:

A

Preserve or enhance asset values over time..

Or at least does not deteriorate through neglect or mismanagement

45
Q

What does full assessment of OPERATIONAL stewardship encompass?

A

Full assessment of operational performance must encompass not only financials, but vital areas relevant to company stakeholders:

  • Highlighting long-term health of the business, such as relations with workforce
  • Establishing culture that favours long-term value creation
  • Dealing openly and fairly with suppliers and customers
  • Having proper and effective environmental controls in place
46
Q

What are two types of prioritization required for Stewardship and Engagement due to RESOURCE CONSTRAINTS?

A

1) Identifying which company in a portfolio is most in need of engagement
2) Determining which engagement issues should be prioritized in the dialogue between the investor and company

( if change is to be delivered effectively, it is impossibel for an investor to raise every possible concern with the company - not least as they risk creating confusion as to what issues the investor believes are most in need of attention!)

CFA ESG 22 (9 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions