Responsible investment has become more prominent over recent years, partly due to extreme weather events, corporate scandals and the greater media profile given to the issue.
There's also a growing recognition that environmental, social and governance (ESG) matters can impact financial returns, and regulatory requirements for fund managers and financial advisers are also driving an increasing interest in this market.
Yet amid the range of approaches to investing responsibly, there's one common strand.
That is the need for investment managers to demonstrate and be held accountable for stewardship of their clients’ assets.
What do we mean by stewardship
“Stewardship is 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.”
This definition was adopted by the Financial Reporting Council in its recent revamp of the UK Stewardship Code.
It is perhaps broader and more far reaching than what many would consider to be stewardship.
Yet it reflects two important goals:
1) Long-term value creation; and
2) A recognition that companies and assets exist within broader social and environmental systems.
For long-term investors, the proper and sustainable functioning of these systems are as integral to generating returns as the companies that operate within them.
Stewardship can be seen through the lens of shareholder voting and engagement which, in many cases, is carried out by asset managers acting as the investor's proxy.
But this lens isn't particularly well focused, with some asset managers placing an emphasis on levels of activity, rather than outcomes, as measures of success.
As a result, there's a risk that investors and clients don't properly engage with or understand the actions of their fund managers, making it harder for them to be held to account.
How to measure it
When it comes to stewardship, one common measure is the extent to which asset managers vote against the recommendations put forward by a company's executive team.
But is a manager who votes against company proposals on 20 per cent of occasions better or worse than a manager who votes against on 30 per cent of occasions?
Without understanding the context of the voting policies and the individual resolutions, there's no way of knowing.
However, we can begin to explore trends in the data. For example, whether fund groups are more or less likely to vote against a company's management team on particular issues.
This provides greater insight and allows investors to understand more about the stewardship activity that fund managers carry out on their behalf.
Voting against management at AGMs requires the asset manager to explain the reasoning behind their vote.
Where asset managers engage with companies in order to create change, they're not just focused on routine governance issues such as executive pay.
Increasingly, they are concerned about environmental and social themes such as climate change and human rights.
In raising and engaging on these issues, there's an acknowledgement that companies have obligations to a range of stakeholders beyond their investors.
The responsibility not just to shareholders but also to customers, employees, suppliers and communities was recently recognised through the work of Business Roundtable, an association of chief executives of major US companies.
Over 180 US businesses signed a 'statement on the purpose of a corporation’, outlining a new standard for corporate responsibility.
Commitments such as these chime with the definition of stewardship set out by the FRC.
Yet the challenges presented by the coronavirus pandemic have served to highlight different standards of corporate behaviour.
Pledges like those of the Business Roundtable depend on firms who invest to hold companies to account. In turn, this requires investors, and their fund managers, to consider which practices are acceptable and which are not.
Questions to ask
There are a number of ways to establish good stewardship. These include:
- ESG capabilities within fund manager selection. Are managers signatories to the UN-sponsored principles of responsible investment, and do they integrate responsible investment factors into their investment process?
- Monitoring the underlying fund managers’ approach to stewardship, and expecting them to exercise voting rights and stewardship in line with best practice, including the UK Stewardship Code.
- Regularly reviewing portfolios to consider how the approach to responsible investment can evolve to meet your clients’ needs.
Ultimately, we believe good stewardship can create and preserve value for investors, companies and markets as a whole.