Sustainable Growth Podcast

Why stewardship is an essential part of the investment toolkit 

Episode 7, Season 7

Today, we’re chatting with Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing at Fidelity International. Over the course of his 15 year tenure at Fidelity, he’s watched as the definition of fiduciary duty has expanded as investors have begun to realize that the boundary of responsibility should not stop at the door of capital allocation, but should also include value creation. This specifically comes into play with the climate transition, and he takes us through the principles of long termism, the materiality spectrum and the complete stewardship toolbox. He also explains how stewardship is just one piece of the systemic change needed to solve the climate crisis.

Host: Jane Goodland, Global Head of Sustainability at LSEG

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  • Jane: [00:00:01] Welcome to the Sustainable Growth Podcast. I'm your host, Jane Goodland and on this week's episode, we catch up with Jenn-Hui Tan, who is the global Head of Stewardship and Sustainable Investing at Fidelity International. And it is an exciting one. Jenn brings us up to speed with stewardship. Talking about what it is, what it's not, and also how far it can take us on the road to net zero. So, let's jump in.

    Jane: [00:00:26] So, hi, Jenn. It's great to be able to speak to you today. I can't wait to get into the conversation. So before we do that, perhaps you can explain your role a little bit. So we know where to start.

    Jenn: [00:00:37] Sure. So first thing, thank you so much for having me it's great to be here. So my role is the Head of Stewardship and Sustainable Investing at Fidelity International. I provide internal and external leadership on our stewardship and sustainable investing activities. That includes how we integrate ESG factors into our investment process, how we vote, and how we engage with the companies that we invest in. I've been at Fidelity for 15 years. I initially started in a role that focused on corporate governance in our Asia Pacific companies, and that's expanded over the years to cover environmental and social issues and a broader global remit.

    Jane: [00:01:17] Great. So we might be familiar and people listening might be familiar with sustainable investing as a term, and we've probably heard stewardship as well. But it would be helpful, I think actually if you can just explore a little bit and expand a little bit for us what you mean and what Fidelity International means by stewardship. What's its purpose? What is it and what's actually involved? Because it seems a bit of a catch-all phrase.

    Jenn: [00:01:41] So I guess if you start with the natural language meaning of stewardship, it's an activity where you take care or manage something, typically something that's been entrusted to your care and so within an investment management context, it's become very closely linked to the notion of fiduciary duty, the responsibility that we have to the clients who give us their money to preserve and enhance the value of those assets. Now, traditionally we've associated fiduciary duty primarily with capital allocation. So in other words, the decisions we make on what companies to invest in on behalf of our clients. But I think increasingly that view is that that is an incomplete definition of fiduciary duty because the boundary of our responsibility should not stop at the door of where we choose to allocate that capital. But it should extend to encouraging value creation within those companies that we are investing in. In practice, this is achieved through engagement, which is a nice way of saying active dialog with an investee company with a specific and targeted objective in mind, and that is generally backed up with formal signalling mechanisms like a vote to boards and management teams.

    Jane: [00:02:55] So can I ask how do you decide what sorts of things to engage with the company on because presumably Fidelity International is investing in thousands of companies, all of which have many, many different types of sustainability related issues. So how do you pick what do you know how to spend your time basically, and effort?

    Jenn: [00:03:16] I think the heart of that question is the question around materiality. What are the issues that are material to long term value creation by a company? And there are two views, broadly speaking. One is a view that you express materiality by reference to financial value. So you look only at the issues that would impact ultimately the bottom line of the company and therefore the amount of money you can return as a shareholder. The second is around double materiality, which is the idea that you should also be incorporating the impact that a company's activities has on the environment and society. And so depending as an asset manager where you sit in that spectrum, you'll engage in either a set of activities that promotes financial materiality or a set of activities that promotes impact materiality.

    Jane: [00:04:03] So where do you guys sit on that spectrum then?

    Jenn: [00:04:05] I think the important thing to say is that it is a spectrum and it's not one or the other, which is what a lot of market participants would claim. I think a lot of that decision is influenced by the time frame for your horizon, because I think our view is that the impacts that a company has on the environment and society, in other words, the negative externalities, to use the economist's phrasing, that does have a financial value on the business over the long term. The question is how long term is long term? And that is different from investment to investment and sector to sector. But generally speaking, we are a long-term investor. We undertake fundamental research with that goal in mind and so we would trend more towards that double materiality end of the spectrum.

    Jane: [00:04:52] And presumably there's the notion of relevance as well as materiality. So presumably it's really important to identify topics that are going to resonate with the management team. Otherwise, they're not going to spend time talking to you about it. So there has to be a certain degree of relevance of the topic to that business, either the current business or the future direction. So presumably the way you select both companies and topics is really important to at the very least manage your workflow because this is a resource intensive activity, I should imagine.

    Jenn: [00:05:27] Yeah. So, you’ve raised a ton of great points there. I think starting with the point around this being a very resource intensive activity, I think the answer to that question is like all good qualitative endeavours, there is a way that you can do it cheaply and there is a way that you can do it well. And unfortunately, looking at it from the outside, it's quite difficult to see who's doing it well and who's doing it cheaply. And the industry has developed very imperfect proxies for looking at the quality of that engagement. So one common one that I get thrown at all the time is the voting record of an asset manager. How often are you voting against company management at a general meeting of shareholders? And the view being that if you vote against more times, your engagement must be better and or more active. If you think about that, even for a little bit, that doesn't even stand up to cursory scrutiny. It's just as easy to automate a vote against as it is to automate a vote for so it doesn't really speak to anything to do with the quality of your underlying engagement.

    Jane: [00:06:36] You talked about engagement, and you've also talked about voting. In terms of voting is one tool in the in the stewardship toolbox, if you like. Engagement in terms of directly with company management is another. Is that a big tool in your toolbox or are you more on the voting end of the spectrum or is it a bit of both?

    Jenn: [00:06:55] I think a vote is a signalling mechanism to management and shareholders. Very rarely have I seen a vote actually change the outcome. It generally speaking, whatever is proposed at a management meeting will get passed, whether it's re-election of a director or whether it's a remuneration report or so on. The value comes from the message you are sending to companies and their management teams through the choices you make on your vote. And so that message, I think, you want that to be very much aligned to the engagements that you're conducting. So actually, I don't tend to think of these things as two different tools. I think of these things as being one combined tool and the other third tool that I think you want to add to a better view of engagement and voting, which then adds up to a complete view of stewardship, is capital allocation. So you can talk, you can vote, but ultimately, if the company is not listening, what are you going to do about it? And that becomes your leverage to effect change.

    Jane: [00:08:03] Yeah, which presumably is in the stewardship toolkit for active managers who are making those capital allocation decisions, but not so much in the toolkit of the passive manager.

    Jenn: [00:08:13] I think it's harder as a passive manager to add a capital allocation. It's not impossible. And I think there's a lot of different indices being constructed, a lot of different ways that you can express that capital allocation view. I would argue it's different and you need to be cognizant of how that expresses itself and the outcomes you can achieve from companies. But ultimately, I think ideally you want these three things to be working together.

    Jane: [00:08:40] Yeah, absolutely. One of the questions that I know has come up lots and lots and lots is, frankly, is it worth it? When you do a whole cost analysis of all the time, energy, etc. In terms of the frequency of outcomes you might engage with, I don't know, lots and lots of companies. And are we seeing the changes being made that you're calling for? And really, fundamentally, is it worth it?

    Jenn: [00:09:08] There's a couple of different angles in there. The first thing to say is that as an industry, there is price deflation is the top line trend. In other words, asset management is getting cheaper and cheaper and cheaper for the people who want to buy that service, which societally is not necessarily a bad thing at all. But in that environment, it is quite difficult to find new models to charge for additional services simply because the overall experience of the end consumer is that things are getting cheaper and cheaper. So there is a harder battle to fight to show that engagement can contribute to broader value creation and is something that's worth paying for. I think it's worth thinking a little bit about what do we think good engagement actually looks like? Because there is a lot of different views in the marketplace. And actually, if you speak to corporate CEOs, the two most common complaints you'll hear is that a lot of investors do engagement as a series of box ticking. Do you have a policy on this or that or that? And if they say that, then they go away or that investors want different things and they're receiving mixed messages and they don't know how to prioritize. And so good engagement actually needs to overcome a lot of these entrenched resistance factors. I think good engagement is a combination of two different skill sets. So first is research. You need to find your engagement on a deep understanding of the company's business, its strategy, its place in the competitive landscape, the regulatory environment in which it operates. The second skill, I think, is consulting, essentially the ability to take that fundamental research and turn that into a focused set of recommendations for management, delivered in a way that makes sense for them to adopt and with proper accountability on the way to measure their progress. Done properly, I think it can be incredibly powerful, possibly I think the most powerful tool in the Asset Manager toolkit, but ultimately it needs to be done in the right way. Otherwise, you're not going to get the right outcomes.

    Jane: [00:11:09] So, that all makes sense but one of the things I'm still curious about is that why some asset managers deploy the strategy of stewardship whilst others don't. And I'm curious to know whether or not this is becoming a normal expectation for the more sophisticated institutional investors. So is this something that you are seeing that institutional investors and I'm talking the large pension schemes, the large sovereign wealth funds, do they expect their managers to effectively be an active steward as part and parcel of what constitutes a good asset manager? Or are you seeing a more pragmatic approach from those big pots of money?

    Jenn: [00:11:54] I think that is becoming the expectation, particularly at the institutional end and particularly, I think with asset managers, asset owners that have long-term horizons to their own investment portfolios. So I'm thinking of sovereign wealth funds, I'm thinking of insurance companies, I'm thinking of pension funds, those with long dated liabilities. And the reason for that, I think, is a very pragmatic and realistic one. It's because the types of factors that we're talking about climate change, biodiversity loss, these are exactly the things that are going to be impacting the value of their investment portfolio over that very long term horizon. I would say it is becoming very much part of that set of expectations. I also think within the capital markets you are seeing one structural trend, I think which we've seen in the last 20, 30 years is the ever-decreasing tenure of corporate management.

    Jane: [00:12:44] What’s the statistic? It’s something like four years or something, isn't it the average tenure of a CEO? Don’t quote me on that.  Trying to remember what the number is, but it’s a low number, right?

    Jenn: [00:12:57] I’m happy you put that one out there Jane, and not me! You know, I think obviously corporate management doesn't want to set up to take short-term decisions. Every corporate manager is looking to try to make that long term call. But it is harder and harder and harder when the pressures that you're responding to are becoming ever more short-term in nature. And that's where I think stewardship and long term institutional owners and asset managers are an important counterweight to that because you are oriented towards that long-term view by virtue of the fact of your portfolio or you're holding all your investment approach. So I think from that perspective, stewardship is also an increasingly important part of a healthy set of capital markets behaviours.

    Jane: [00:13:38] It's fascinating really, isn't it? Because there's this it feels like there's this a permanent tension almost between on the one hand the drive for quarterly results, in a certain direction, coupled with some of the longer-term asset managers saying yes but we also need to ensure that the long-term returns are there. So, I think you're spot on in terms of this need for different ends of the spectrum working in tension always with one another. I think that obviously quite naturally I suppose the stewardship, the long termism, that's where sustainability issues reside. These are the issues which are starting to crystallize over decades, not quarters. So I think stewardship does play a really important role there. Can I come back to something you talked about earlier in terms of one of the critical components of stewardship is research, and obviously underpinning research is data and information. Tell me about what's going on in the world of ESG data and research. It seems to be a bit of hot topic right now. And how important is data and access to ESG information relevant or important to what you do?

    Jenn: [00:14:52] Yeah, that's a real hot button topic within ESG. I also, before I forget, because it's prompted by something you said, I want us to come back to something around the role of stewardship in transition.

    Jane: [00:15:03] What, climate transition?

    Jenn: [00:15:04] Well, generally sustainability transition, but specifically around climate transition and the role that it needs to play in changing corporate behaviours. I think the data piece is crucial to that. Data has become a little bit the reason people give for not being able to implement ESG properly.

    Jane: [00:15:23] What, because the data doesn't exist or there's gaps?

    Jenn: [00:15:26] Yeah. If only it was perfect. If only it was comparable, if only it was consistent, etc. I would be able to implement ESG flawlessly. I think we need to stop accepting that as an excuse. I think you can, we see great examples of qualitative ESG integration being done on the data that we have. Accepting the data is not perfect. We can still draw conclusions from what we have. I think the ESG data environment is actually getting much better and a lot of regulation is driving that. Market demand is driving that. But I think the key becomes how do we take that data and use it in an intelligent way? So what are the right conclusions that you draw from that data set? I'll give you two examples of that. One is data that is around policies that a company has so it's actually binary data, Yes, or no? Does it have a policy on corporate whistleblowing or does it have a policy on net zero? And actually, some of the studies that I've seen suggest that is a lagging indicator and actually potentially a predictor of future underperformance. So simply just saying a company has a policy does not of itself give you a view on whether or not that company is going to outperform in the future, which is ultimately the goal of ESG here to inform financial analysis. Whereas if you have data that speaks to underlying conditions of the business, so say a data set like employee turnover or emissions intensity, these indicators have the potential to be more forward looking because you can extrapolate that and you can say, this company has experienced a spike in its employee turnover over the last three years. What is that saying to me about the culture of that business? What does that say to me about the future productivity of those employees? I That's the kind of data that the asset management industry needs to make those decisions.

    Jane: [00:17:19] I guess one way to look at it is thinking about ESG data as an input it's not the everything. And actually not all ESG data points are equals and actually maybe the outcome focused data points are probably more valuable, in terms of that research analysis.

    Jenn: [00:17:34] I completely agree with that. And I think part of the challenges of the way ESG has been implemented, which has led to suboptimal outcomes and some of the pushback that we've seen last year is around the use of third party ratings, which essentially score ESG disclosure and punish companies for not disclosing appropriately, just taking that rating a single number or a score or a letter and dropping that into investment process at best it will be irrelevant, at worst, you might actually do your portfolio harm because you're not really understanding what that information signal is giving you. But I think using raw corporate data that is disclosed in a consistent and verifiable way, being able to take that and draw conclusions from that, that I think is the future of quality ESG analysis.

    Jane: [00:18:24] I've got a question which is probably I don't know, is it fair or not fair? But this all sounds fab, right? It sounds really, really great. But what I'm curious to know is what can stewardship not do? You've got a great toolkit of engagement and voting, but what can the approach of stewardship not do?

    Jenn: [00:18:42] Not enough people ask that question, I think. Stewardship is going to struggle to create the systemic change that we need to see happen. I think the idea that we can solve climate change through a series of well-intentioned active dialogs with companies. You can help, you can contribute but systemic change requires changes in the enabling environment that drive all of the market behaviours that we see. Stewardship is and actually stewardship suffers from attacks from both sides. People who say it's ineffectual and meaningless and facilitates greenwashing, and then people who say well, actually it can be an effective substitute for government intervention, like it's neither of those two things and that's part of the challenge that stewardship practitioners need to bear in mind. You need to be realistic about how you achieve the goals that you're setting out to achieve and you need to be realistic about where the level of policy needs to come in and what the role of finance is in helping to create a better enabling environment and where problems are not linked to individual companies, but actually are systemic problems in the value chain of a certain business or activity. I can give you an example of something that we encountered where we hit upon the limitations of that during COVID, if you like. It was an issue of seafarers actually being stranded at sea. And the underlying problem was that they weren't being allowed to disembark because of COVID restrictions in different ports. And so, you couldn’t affect crew changes, but the end outcome was that at its peak, you had more than 400,000 people who were serving on ships that were transporting the overwhelming majority of the world's produced goods and services, including oil and gas. They were serving at sometimes 18 or 24 months on board a ship, which was both a humanitarian issue, but also a significant risk to the safety of the cargoes that they were transporting. And when we tried to dig into this, our first angle of attack was, well, the shipping companies are responsible, aren't they? They're the ones who should be facilitating crew changes because that's their job. And then the response from the shipping companies was, well, actually we can't because we can't change routes because our charterers don't let us they contract with us to deliver a good from point A to point B in Y days of time. That's what we can do I can't do anything about the breaching contract. So then we went to the charterers and we said, well, you need to provide flexibility because this is a systemic issue to the key part of the world supply chain. And then they in turn said, well, look, the governments are not allowing us to make any change. And then even if they are able to get off, airlines are not running properly and so they can't get flights out of the country. And so you have to charter very expensive private planes, which is not a scalable activity to get to repatriate seafarers and bring new ones on board. And so very quickly, you end up with a view that this is actually a systemic problem. It's not the fault of any one participant in the thing. The problem is that the entire way the thing has been constructed, which includes, by the way, which is a much longer discussion, the working conditions and the employment conditions of seafarers which have essentially become contractors now in this very dislocated supply chain that we've constructed for ourselves. And actually, what you need is a more system level fix that tries to look at the root of how these things arise, rather than punish individual actors within a value chain for trying to do what the economically and rationally need to do.

    Jane: [00:22:18] That example's really useful to bring it to life. And I think it just reinforces again with great clarity the need if we're truly going to move and transition to a more sustainable economy, it cannot be individuals. We have to be thinking of system level and every actor has their part to play. And if ever there was a desperate need for collaboration, we've got that right now right here. So here's hoping that we live up to that need because, we're living in volatile times now and actually from a time when we had a very globally connected world, it seems that we might be moving into a different phase where that's less the case. And actually, we're entering a different phase. So, Jenn, I think I could talk to you for hours, and it’s fascinating. But a final thought from you?

    Jenn: [00:23:10] Just one quick point that you mentioned around transition. And why stewardship, I think, needs to be an essential part of an investment toolkit, which includes capital allocation. Some people have a view sometimes that you can transition simply by funding great businesses and defunding bad businesses. So I as an asset manager can go out and buy a whole bunch of renewable companies wind, solar or whatever. And I cannot buy these fossil fuel companies that are busy polluting the planet. The problem with that narrative is that you won't get transition without the existing owners of the large pieces of our economic engine being part of that movement. You are not going to fund a bunch of renewable startups without also thinking about what is the role of the existing energy companies in that system and how they need to adapt their businesses to change to support that decarbonized transition that we need to see happen. And so that's where I think you run up against this idea that exclusions and divestments of businesses aren't really going to get you to the end outcome, not least because someone else is almost certainly going to buy it, even if you don't own it. But actually what you need to be doing is applying constructive pressure and engagement on the companies that you do own for them to change the way they currently conduct their business in order for them to be part of that transition and benefit from that transition, which is what we're looking for as their shareholder or bondholder.

    Jane: [00:24:34] And together with that constructive engagement, the provision of capital to then implement the changes. So, transition finance I think is incredibly important and not just simply taking capital away from companies that need to transition because that's the very moment that they need the capital to transition. Jenn, it's been fascinating and a great insight in terms of the role of stewardship in the big picture, actually. So it's been fascinating. Thank you so much for coming on and sharing your experience with us and also giving some of those insights. So thank you so much indeed. It's been fab and speak to you again soon, hopefully.

    Jenn: [00:25:13] Thank you, Jane. I've really enjoyed this conversation.

    Jane: [00:25:16] So that's it for this week's episode of the LSEG Sustainable Growth Podcast. If you're not already following us, then do give us a follow and rate us on Spotify, Apple Podcasts, or wherever you get yours. If you've got questions, comments, or you want us to talk to someone in particular, then drop us a line at  See you next time.

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