Turning sustainable intentions into fiduciary practice
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", 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 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 screening for 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 managing the money should 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.
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