Investment Stewardship

What Is Investment Stewardship?

Investment stewardship involves engagement with public companies to promote practices of corporate governance that are consistent with inspiring shareholders' long-term value creation in the company. 

Engagement and voting provide an opportunity for shareholders to express their views.

Hence, engagement can include one-on-one meetings with representatives of the company board or management, writing letters to companies, and other various activities. 

Key Stakeholders in Investment Stewardship

Below are some of the key stakeholders in the field of investment stewardship. 

Asset Owners

Asset owners are the ultimate beneficiaries of investment stewardship activities. 

They can be public or private pension funds, insurance companies, endowments, foundations, family offices, or sovereign wealth funds.

Asset owners can invest in company stock in two ways. Either purchase stock directly or hire an asset manager to invest on their behalf. 

Thus, asset owners own the investment risk affiliated with their investments and any gains or losses in the value of those investments.

Asset Managers

Asset managers are fiduciaries who make investment decisions on behalf of their clients. They can be active or passive managers and may specialize in a particular asset class or type of company.

Index Providers

Index providers create and manage indices that are used to benchmark the performance of investment portfolios.

They also develop environmental, social, and governance (ESG) data products that investors can use in their investment processes to integrate ESG considerations.

Index providers explain the index inclusion rules, which determine the securities that contain each index.

Proxy Advisors

Proxy advisors provide research and voting recommendations to asset owners and asset managers on how to vote for their shares at shareholder meetings. 

They also engage with companies on behalf of their clients on governance-related issues.

Proxy advisory firms provide voting infrastructure; some offer consulting services to public companies.

Stewardship Tools for Investors

These are the stewardship tools for investors:

Engagement

Engagement is a dialogue between investors and companies to promote long-term value creation. It can take place through one-on-one meetings, letters, or group meetings.

Engagements can be accomplished individually, collaboratively with other investors, or through a service provider.

Voting

At shareholder meetings, asset owners and asset managers can vote on resolutions put forth by shareholders or management. 

They can also submit their resolutions for consideration.

Voting is a way for investors to hold companies accountable and influence corporate governance practices.

Escalation

In some cases, engagement and voting alone are not enough to effect change. When this happens, investors may escalate their activities by working with other shareholders, the media, or regulators.

Why Conduct Stewardship?

Here are the reasons why stewardship should be conducted:

Improving Risk-Return

Engagement is a way to mitigate risk and improve returns by addressing material issues early on.

Fiduciary Duty

Asset owners have a fiduciary duty to their beneficiaries to act in their best interests. It includes conducting due diligence on investments and engaging with companies to promote long-term value creation.

Thus, it is vital to consider the achieved results and processes followed to assess if these duties have been met.

Regulation

In some cases, regulation might require or encourage asset owners and managers to conduct stewardship activities. 

For instance, the EU's Sustainable Finance Disclosure Regulation requires institutional investors to disclose their policies on integrating sustainability risks into their investment decision-making processes.

In some jurisdictions, asset owners and managers are required by law to disclose their stewardship activities.

Universal Ownership

All companies are owned by someone, whether a single shareholder or a large group of shareholders. As such, all companies are accountable to their shareholders.

As more countries adopt universal pension systems, more people will become long-term shareholders in companies. 

This shift creates an opportunity for asset owners to influence corporate behavior for the benefit of all stakeholders.

Focus On Real-World Outcomes

Many investors focus on environmental, social, and governance (ESG) issues because they can have a material impact on financial performance. 

This focus is driven by the understanding that ESG factors can affect a company's ability to generate long-term returns.

There are more expectations from clients, regulators, and beneficiaries for investors in considering the real-world outcomes of their investments.

Final Thoughts

Investment stewardship is how asset owners and managers promote long-term value creation for their beneficiaries. It includes engagement, voting, and escalation.

Stewardship tools are used to mitigate risk and improve returns. Ultimately, stewardship is about creating a better world for all stakeholders.

FAQs

1. What is investment stewardship?

Investment stewardship is the process of promoting long-term value creation for shareholders. It involves engagement with companies, voting at shareholder meetings, and sometimes escalation.

2. Why is investment stewardship important?

Investment stewardship is important because it can help to improve risk-return and address material issues early on. It is also a way to meet fiduciary duties and comply with regulations.

3. Who conducts investment stewardship?

Asset owners and asset managers typically conduct investment stewardship. In some cases, index providers and proxy advisors might also be involved.

4. What are some common stewardship tools?

Engagement, voting, and escalation are all common stewardship tools.

5. What are some common principles of stewardship?

Some common principles of stewardship include universal ownership, focus on real-world outcomes and long-term thinking.