What's next for stewardship reporting?

The shift in ESG from exclusionary to inclusionary investing has revolved around the work of stewardship. Asset managers have taken on the mandate of improving the environmental, social, and governance impacts of the companies they invest in through active engagement with company boards. Stewardship has introduced a massive degree of sophistication into asset managers’ ESG strategies but with that work now comes a mandate to report.

British Columbia Investment Management Corporation (BCI), the asset manager for much of British Columbia’s public sector, recently released its first annual stewardship report. The report sets a new standard for ESG managers, highlighting the specific work of stewardship rather than including that work within a wider ESG report. Jennifer Coulson, Global Head of ESG at BCI, explained why her organization elected to pursue this reporting strategy as well as what the exercise of reporting on stewardship unveiled about their progress towards greater ESG impact and how much further they have to go.

“The impetus came from our decision to pursue an integrated corporate annual report in line with the ISSB standards. We wanted to house our overarching ESG and climate data alongside our financial reporting, without losing any of the other really good information that used to be included in our standalone ESG report,” Coulson says. “So we decided to keep the separate report but zero in on our work related to engagement, proxy voting, and policy advocacy, because probably the most common question we get from clients and their beneficiaries is what are we doing around stewardship.”

The goal of the report, Coulson says, is to go granular and give stakeholders a clear picture of how BCI engages with the companies in their portfolio. By shifting their ESG reporting into their core reporting process, they freed up the space for this more granular detail on stewardship.

Those granular details, Coulson explains, clearly show BCI’s engagement priorities, their process of examining a portfolio and onboarding stakeholder input. Coulson explains that her team are constantly taking on inputs about what matters to clients and their beneficiaries. Chief among those issues raised has been climate change, but a range of areas from social impact to governance changes are raised in this engagement process. Case studies highlighted in the report, Coulson says, can bring these issues and questions to life.

The report notes that BCI directly engaged 134 pubic and private portfolio companies, achieving their objective or seeing positive progress with the engagement in 58 per cent of cases. Their work also supported “collaborative engagements” with over 2,000 additional public companies. They engaged with bond issuers, too, supporting structures more aligned with ESG best practices. Coulson says that when assessing stewardship, those activity numbers are instructive and lead to some wider outcomes.

While not all positive ESG outcomes can be tied directly to BCI’s stewardship work in particular, Coulson sees the wider trend towards stewardship moving the needle in Canada. At the outset of BCI’s engagement work, she says, women held 9 per cent of the board seats on companies in the TSX Composite index, now they hold over 36 per cent. ESG disclosure under the SASB Standards by TSX companies is up 425 per cent over just the past few years. Not only are more companies disclosing, Coulson says they are providing more robust ESG data for her to engage with.

While progress is being made, Coulson sees room for improvement within companies’ ESG progress and institutions’ stewardship work. Chief among those recommendations is a ‘back to basics’ approach with a greater focus on governance. The ESG narrative can result in stakeholders being a little lost in the ‘E’ and ‘S’ parts of their work. Governance, Coulson says, can be a huge determinant of corporate performance overall and on ESG metrics. She says that during the past proxy voting season BCI voted against or withheld its vote for director nominees 34 per cent of the time for governance reasons. Those could be on issues like independence or compensation decisions. These are areas that can result in better overall corporate performance as well as better ESG performance. Coulson views governance as foundational to overall performance.

While Coulson says that for many institutions and companies ESG and stewardship reporting is no longer optional, she thinks there is still room to improve. Namely, more consistent, comparable data will be key to ensuring that ESG standards are easier to understand. While companies are shifting towards this on an elective basis, Coulson argues that a mandatory approach from regulators can help.

As other asset managers and institutions continue their own stewardship work and ESG reporting, Coulson hopes that they can take some lessons from what BCI has done here to make stewardship a more explicit, core piece of their wider work.

"Stewardship is such an important piece of the puzzle. I think we get bogged down sometimes in terminology, and there's a lot of confusion around what ESG means, but stewardship is always foundational. You have rights as a shareholder that you need to exercise, and stewardship is just an element of how you oversee your investment portfolio,” Coulson says. “There's a really crucial role there in terms of what [plan sponsors] expect from their asset managers. I would certainly say, they should ask for that kind of transparency, ask how they're using these rights. Ask how they're contributing to broader systemic risk management through their stewardship practices.”