Timo Busch is a professor at the School of Business, Economics and Social Science, University of Hamburg, Germany, and a Senior Fellow at the Center for Sustainable Finance and Private Wealth at the University of Zurich, Switzerland.
How can investors conduct stewardship?
Timo Busch: There’s a whole range of options, from actively using shareholder voting rights at annual meetings to push for the sustainability agenda, to direct dialogue with the management or company representatives to raise these topics. If you’re a majority shareholder, you can do this on your own. But as a minority shareholder, you can increase your effectiveness by pooling your assets with other investors.
The effectiveness of any stewardship approach is determined by whether it creates real change.
What makes a stewardship approach effective?
The effectiveness of any stewardship approach is determined by whether it creates real change. But it’s also essential to record what you do, and the outcomes. When you use your voting rights as an investor, ideally, you should document what your proposal themes were, which companies you addressed and what the outcomes were.
This also applies to dialogue with companies. If you start a dialogue with other investors at a roundtable on a particular topic with a company, always record this, explain what the issue was and show how the company changed, for example, by reducing their carbon footprint. This kind of documentation is important to demonstrate how effective engagement can work.
Does stewardship have potential for a massive shift towards action?
Resoundingly yes, but we need to achieve a critical mass of investors willing to throw their backing behind a certain issue. That's the essential lever. If it's just a few individual shareholders, it probably won’t be successful.
What is the role of proxy voting in stewardship?
Voting can be a powerful tool, but we’re only at the beginning of using it in a sustainability context. We need more research on the conditions under which it works best, and to generate insights on how to improve its effectiveness as a tool of stewardship.
Do some countries have a more advanced approach to (proxy) voting than the German-speaking regions of Europe?
Yes, primarily the US, because they have a longer tradition in this area. Shareholder proposals are also more popular for companies based in the US or North America.
It’s more difficult to work on sustainability in emerging markets.
What are the challenges of stewardship in emerging markets? Are other strategies needed?
It’s more difficult to work on sustainability in emerging markets, and the challenges are very different. In Europe, we have high environmental protection standards by law. Many developing countries don’t. Therefore, it would be more effective to organize workshops, train people and join up with development agencies to raise awareness and spread information on technologies for environmental improvement.
We should also think about industry standards. For example, the Accord on Fire and Building Safety was released after the horrific collapse of a factory building ten years ago that killed over 1000 people. The Accord was set up by the garment industry as a set of self-regulating standards. This is something investors could do by working collectively to promote certain standards, offer workshops, etc.
How are companies doing on sustainability in the industrialized world?
Most companies in the developed world have a sustainable strategy. You could claim they’re sustainable – at least they have strategies. But we know this isn’t the case: greenhouse gas emissions rise every year. We still have a lot of major ecological issues like biodiversity loss. A lot more needs to be happening in the environmental areas, but also in the social sphere.
Governments have taken a prominent role through the landmark UN Sustainable Development Goals.
You could say it’s the role of governments to do this, but do we really want a world where government regulates every detail? Probably not. But if companies just talk instead of radically changing their business model, and if we don't want more government regulation, what can we do? Rely on consumers or NGOs to take action? I look to the financial services industry, because it has a stake in almost every company. If the financial industry took strong, collective action to improve the economy, this could be very powerful.
How is this responsibility being taken up by companies?
Sustainability and sustainable investments are no longer a niche topic. They’ve become mainstream. All the major corporations have sustainability in their strategy, but the pace of change still isn’t fast enough.
If we continue "business as usual" emission levels, and we're serious about 1.5 degrees as agreed in Paris, we have 6.5 years to go. There’s no button to push to reduce CO2 emissions to zero overnight. We need urgent, significant action now, in addition to science-based targets for 2040.
Stewardship is a long-term process. Do you see a conflict since climate action is urgent, while engagement takes time?
If an engagement strategy takes eight to ten years to be successful, we don't have the time. Management usually acts quite fast on financial issues, and this should be possible for sustainability too. If management approaches sustainability with the same urgency, emission reductions will still only occur in three to four years because new capacities, like on-site renewable energy production, often take time. But meanwhile, stewardship and engagement can get milestones and a clear plan set out very fast.
Would you say there’s a lot of talk, but few binding plans, in the private sector?
Exactly. A recent report from CDP, a non-profit environmental disclosure platform, illustrated that many firms are falling short of credible plans to align with a 1.5-degree climate transition plan. Investors need to push for more commitment and immediate action – and use their power.
If we’re not moving fast enough, what options beyond stewardship do investors have, especially as approaches like engagement and voting need time?
When you talk to people in the business world, you often hear "we can't change, it's too difficult, or expensive, or won't work". There are so many excuses. But there are also many best-practice examples where a start-up, or a committed manager in an established firm, have clearly shown that change is feasible and effective. We need to document more best practice cases to highlight what works. And investors should engage with companies where they’re invested or intend to invest, and support them to take up game-changing solutions with technology transfer, for example to make them energy self-sufficient, or to establish a 100 percent closed loop system.