Turning sustainable intentions into fiduciary practice
We explore why investors need to understand the sustainability of returns and potential risks on the horizon, from cyber security to tax clampdowns, are as important as understanding the valuation of assets.
19 April 2016
A clear trajectory has built up since the end of the last century establishing good governance and oversight as an important part of the fiduciary duty of both companies and investors.
This trend shows no sign of slowing: stewardship codes for asset managers and owners are being rolled out around the world. As they become established, expectations are rising.
Investors demand sophistication and transparency
The growing demand is for those in the investment chain to be transparent about their activities, objectives and outcomes in the governance arena.
Best practice is no longer signing up to a code, voting and never discussing the issue again.
The direction of travel is clear – a better dialogue between owners, investors and companies on the thorny long term issues that companies face: strategy, board succession, and stakeholder management.
The most sophisticated asset owners are already questioning their managers, not just on their buy and sell processes, but on their approach to ownership.
They expect detailed reports and a quantification of impact. This move away from tick box governance will lead to more changes over time, and we welcome this.
More engaging investment style
Investment reporting will focus not only on performance statistics but also on engagement activity. Asset owners should understand their manager’s governance style as closely as they do their investment style.
We expect to see an evolution of the fiduciary’s agenda, with governance appearing more frequently in discussions.
This should all mean companies should expect to face closer oversight of their activities, and more demanding questions coming from investors as a result.
This will not take the form of a “shareholder spring”, as many have advocated in the past, but an ongoing evolution and an onward push towards higher standards.
Some commentators are calling for more explicit guidance and clarification aimed at embedding environmental, social and governance (ESG) considerations into investment processes as part of fiduciary duty.
Are ESG risks real?
An important first step is already well established with the existing focus on governance.
If there is an effective board, with active debate, robust internal controls and good risk management, the board should have good oversight of, and strong policies to manage, the E&S risks across the same business.
Recent comments from policy makers and regulators around the world have shown that they see fiduciary duty and consideration of ESG issues as compatible, giving further impetus to an investment approach that seeks to integrate these considerations.
As fundamental investors we know that assessing how companies deal with all of their stakeholders – customers, clients, employees and civil society – affects corporate performance and plays a role in investment decisions.
Understanding the sustainability of returns and the potential risks on the horizon – from cyber security to tax clampdowns – is as important as understanding the valuation. ESG risks are real risks.
Does ESG add value to investing?
In our experience, a rigorous understanding of all the risks that a company faces – financial, environmental, social and governance – leads to better investment decision making.
Ensuring that companies are being run in a long term sustainable manner through engagement by their owners further improve returns.
Those with fiduciary responsibility should be encouraging those managing their money to take such a long term holistic approach to investment.
They should also be looking for evidence that ESG integration is more than greenwashing but adds value to investment processes.
Current policy changes underline the importance of the process that many asset owners have already embarked on.
Read the full report
Turning sustainable intentions into fiduciary practice 8 pages | 421 kbDOWNLOAD
Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.