PMI Crest
Effective stewardship across asset classes
17 July 2020

Effective stewardship across asset classes

Insight Partner

Responsible investment means more than avoiding harmful sectors and seeking out sustainable opportunities elsewhere. Active managers should use their influence as stewards of capital to encourage positive change through engagement and voting. With this in mind, we consider what effective stewardship means across the asset classes most appropriate to pension fund trustees.

The growing demand for financial decisions to reflect environmental, social and governance (ESG) considerations is no longer a trend driven by personal values alone. There is now widespread awareness that aligning investment decisions with ESG considerations can enhance financial performance. Momentum is increasing from a regulatory perspective too1, while the updated UK Stewardship Code, which came into effect on 1 January this year, has set high expectations of those investing money on behalf of UK savers and pensioners2.

But responsible investment is more than avoiding certain sectors and seeking out sustainable opportunities elsewhere; its core purpose of ‘doing good’ must prevail. Active managers should use their influence as stewards of capital to encourage positive change through constructive dialogue and voting, ultimately driving a more responsible world. We consider what effective stewardship means across the asset classes most appropriate to pension fund trustees.

Engagement and COVID-19

Stewardship efforts are being impacted by the coronavirus pandemic, with longer-term sustainability issues harder to focus on as many companies concentrate on the immediate fallout from the virus. Overall, however, this crisis reminds us of our responsibilities to society. Dealing with the pandemic requires all of us – whether individuals or businesses – to consider the wider implications of our actions, a concept which is at the heart of responsible investment.

And whilst the immediate aftermath of the crisis saw some disruptions to the ESG agenda, such as postponed company meetings, we have continued to pursue our wider stewardship priorities, cognisant of the fact that this crisis will take many months to resolve, and that sustainability cannot just be put on hold. At BMO Global Asset Management, we chose climate change as our engagement priority in 2020. After careful consideration, we decided to maintain our focus, while of course remaining sensitive to the current situation. The fact that May 2020 was the sunniest month ever in the UK is a reminder of just how much our climate is already changing. With the rescheduling of the critical COP26 meeting to 2021, we will work to build momentum towards a successful outcome.


Stewardship delivers the best outcomes when it focuses on the right issue for the right company at the right time. Engagement should therefore vary by company and the ESG issues at hand, ranging from ongoing dialogue with boards and senior executives to dedicated site visits. Meanwhile, collaborative investor engagements and initiatives can be key to improving ESG standards at a larger scale.

In 2019, we had 1,509 engagements with 765 companies across both equities and fixed income. 30% of our engagement linked to environmental issues, with highlights including a significant number of companies improving their climate-related disclosures and/or committing to ambitious emissions targets, including, Duke Energy and Volkswagen announcing net zero pledges. Approximately 47% of our total engagements were held with board directors and senior executives, with the remaining interactions held with company 

representatives, including investor relations professionals, company secretaries or sustainability specialists. 51 of our engagements were collaborative engagements with other investors and stakeholders.

Fixed income

Bondholder engagement is a concept that has only recently gained widespread acceptance. A major hurdle for early adoption was the question of whether investor stewardship should span beyond equities to include asset classes that don’t grant the investor formal ownership rights. It was also unclear how issuers would respond to creditors requesting engagement meetings to discuss the management of ESG issues.

Our experience in engaging fixed income issuers contradicts this, and we have had little difficulty in securing meetings. A key factor is the need for continuous refinancing. Whereas companies only very rarely come to the market to issue additional equity, bond issues are much more frequent. The desire for these issues to be successful, we have found, is a strong reason for bond issuers to accept engagement meetings and to discuss ESG issues. Moreover, the impressive growth of the Green, Social and Sustainability bond issuances has further improved investor access to traditional bond-only issuers and, as a result, they have added ESG to their agenda.

Metals and mining company Glencore is an example of an issuer to which we assigned a negative ESG Credit Score on both a current and a forward-looking basis. This reflected increased legal risk linked to activities in markets in which it operates, as well as the impact of environmentally damaging mining practices. We developed an engagement programme and have engaged the company 36 times since 2011. While progress has been made with the publication of various ESG policies on human rights, climate change and water management, we believe that more needs to be done to fully restore investor trust in the company’s ESG practices.

Liability-Driven Investment

Liability-Driven Investment (LDI) has not historically been seen as an asset class where stewardship activities have high relevance. We worked with our LDI team and identified that engagement with counterparty banks is a matter of long-term business viability, and comes with a special responsibility for the relationship. Over the past two years, we have engaged LDI counterparties approximately 90 times on ESG issues, including corporate governance (including board accountability and effectiveness, as well as executive remuneration), risk & compliance systems (including anti-money laundering procedures) and business ethics & culture. In 2019, we explored the environmental and social risk management policies and practices of counterparty banks.

Concluding thoughts

Effective stewardship across all asset classes should now be considered as front and centre within pension fund management, whereas in the past it may have been perceived that responsible investment applied to equities only. The variety of investment vehicles available to funds to choose how they want to invest now helps even the smallest funds exercise their fiduciary duty and adhere to the new UK Stewardship Code.

  1. Regulation (EU) 2019/2088 of the European Parliament and of the Council on sustainabilityrelated
    disclosures in the financial services sector, 9 December 2019; Updated version of the
    Occupational Pension Scheme (Investment) Regulations 2005, October 2019.
  2. UK Stewardship Code, Financial Reporting Council

This article was featured in Pensions Aspects magazine July/August edition.

back to Pensions Aspects Magazine

Last update: 21 July 2020

Paul Myles
Paul Myles
BMO Global Asset Management
James Edward
James Edward
BMO Global Asset Management

Assistant Pensions Investment Consultant - Berkshire

Salary: £31500 - £37000 pa

Location: Berkshire

Senior Pensions Governance and Secretariat Consultant

Salary: £70000 - £90000 pa

Location: Hampshire

Senior Pensions Analyst

Salary: £55000 - £75000 pa

Location: London

You may also like:

Governance – what can we learn from Master Trusts?
08 October 2021

Governance – what can we learn from Master Trusts?

Since the modern day Master Trust was first established in 2012, they have become a phenomenon and are now amongst the most popular form of Defined Contribution (DC) Pensions Savings. One of the key factors to their success has been the governance structure underpinning them. From The Pension Regulator’s authorisation and supervision regime, to the efficient operation of the Board, Master Trusts have proved that strong governance does lead to better outcomes. This article explores the key learnings from Master Trusts and whether these principles can be applied to other pension schemes.

Read more
Responsible investment beyond the coronavirus
08 October 2021

Responsible investment beyond the coronavirus

How the investment community can help advance the environmental gains that have come out of COVID-19

Read more