Prioritising stewardship in 2023

As ESG’s momentum grows, investment teams are under mounting pressure to prioritise sustainability and stewardship. With investor expectations and regulations continually evolving against the backdrop of a volatile global economy, a solid active ownership strategy is important to maintain competitive advantage, and create and sustain long-term value for our society.

But what exactly is stewardship, and what does doing it well look like? How can asset managers make sure they’re doing enough to meet the challenge? Here’s a rundown of what you need to know in 2023.

Stewardship: Investor and regulator expectation and understanding

In today’s business environment, a well thought out and implemented ESG strategy is no longer a nice-to-have, but a necessity to ensure the success and sustainability of an organisation. Consumers are increasingly aware of the influence of their money and, as investors, expect companies to actively demonstrate high standards of environmental, social and governance practices both within their organisation and across their supply chains.

But ESG is just one part of a bigger picture; ‘investment stewardship’ refers to the concept that the values of fund shareholders should be accurately represented through fiduciary duty. Public discourse, proxy voting, and engagement are all stewardship tools that asset managers can utilise to create long-term value for their clients.

To confuse things, there is no one global definition or understanding of ‘stewardship’, let alone ‘good stewardship’,and there will always be localised differences in what is considered best practice. The UK’s Stewardship Code, published in 2020, defines the process as: “The responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society”.

Whereas the United Nations Principles for Responsible Investment says “Stewardship is investors using their influence over current or potential investees/issuers, policy makers, service providers and other stakeholders – often collaboratively – to maximise overall long-term value. This includes the value of the common economic, social and environmental assets on which returns and clients’ and beneficiaries’ interests depend.”

According to the latter definition, asset managers should use their influence to induce positive change in a wide range of entities, from corporations and governments to other stakeholders. According to the UN, there is an inherent connection between lucrative returns for businesses and attaining social or environmental objectives.

For most working within the investment industry, any definition of stewardship would likely include the term mentioned previously; ‘engagement’. Engagement refers to the important conversation between institutional investors and public companies whereby influence is used to generate long-term value for beneficiaries.

From all perspectives, better use of money and better risk management are the foundations of good stewardship.

The risks of not prioritising stewardship

Prioritising stewardship delivers the best results for shareholders. Now more than ever, fund managers need to take steps to ensure their investments align with sound stewardship principles, or else miss out on opportunities for improved returns. Good coordination between portfolio managers, analysts, and governance teams creates an information advantage that in turn impacts trading decisions and benefits the bottom line.

Growing regulatory presence is another reason to ensure that asset managers take a proactive role in overseeing and influencing investee companies. A growing list of countries have introduced stewardship codes – some voluntary, some mandatory – which outline good practice for investor engagement with companies and are designed to enhance the quality of this engagement.

It reduces risks: Poor stewardship of investments can create significant risks, such as potential financial losses or reputational damage. By taking a responsible approach to stewardship, asset managers can help protect their clients and themselves from these risks.

Lastly, good stewardship  improves client relationships. Clients are increasingly looking for asset managers who are willing to go above and beyond when it comes to responsible investing. By prioritising stewardship, asset managers can demonstrate their commitment to their investors’ best interests.

The purpose and benefits of a stewardship strategy

Stewardship improves both corporate financial performance and real world outcomes. Applying appropriate policies can revolutionise the way businesses operate, leading to increased transparency and accountability that drive long-term profitability. They can also provide a major step towards establishing an active corporate culture of responsibility for all stakeholders in society – one where investors have faith their decisions will create positive change.

Asset managers are becoming more accountable for the real-world outcomes of their investments as global stakeholders ratchet up expectations in terms of their values. With this comes a greater need to use influence, engagement voting, policy dialogue or other such instruments that can help drive positive changes from within. Divestment has its place, yet it weakens external control over decision making, which could hamper progress towards a better society and environment – the UN’s Sustainable Development Goals providing an external reference point here.

By prioritising investment stewardship, asset managers can create long-term value for their clients, protect their own interests and do their part to create a more responsible, resilient and equitable financial system.Investment teams need to be aware of what investors expect, and work continuously on improving their governance standards in order to stay competitive and meet these expectations. As the window for limiting climate change rapidly closes, we expect to see an enhanced focus from regulators (e.g., emissions reporting and, for some, mandatory reporting through the Task Force on Climate-Related Financial Disclosures) and investors through the potential expansion of collaborative engagements (e.g., Climate Action 100+). 

If you’re ready to focus on stewardship and maximise returns, contact SIEngage today – our cloud based system is designed specifically to streamline engagement data gathering and performance tracking, reporting processes, ensure compliance with regulatory requirements, and accelerate your stewardship initiatives!

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