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Managers' views

Demystifying stewardship: How is it really done?


Anastasia Petraki

Anastasia Petraki

Head of Policy Research

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In a world where the word “sustainability” features everywhere and is in everyone’s mind, the word “stewardship” seems almost old-fashioned. We think it is anything but. It is an inseparable part of investment and sustainable investing cannot occur without it. But there is also lots of confusion about what it means and how it works in practice. Here, we bust some of the most common myths about “stewardship”.

Myth 1: Stewardship is a compliance exercise

Stewardship is a complex, umbrella term that incorporates distinct activities that interconnect and feed into each other. It involves substantially more than developing a policy to comply with a code. Instead, it is about analysing, engaging on both a micro and a macro level, and working with others to affect change. The purpose is the creation of sustainable, long-term value for clients and not simply “doing good” at the cost of returns. It is an essential component of managing risk in order to maintain long-term value. If it is effective, it will lead to better investment decisions, improved client value and there will be an indirect benefit for the economy and the environment, although this is not the primary driver of stewardship.

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Myth 2: Stewardship is all about shareholder primacy

Although a commonly held view is that the main goal of every company is to maximise returns for its owners – sometimes referred to as “shareholder primacy” for listed companies – stewardship activities can be driven by the principle that companies must deliver long-term value for shareholders and have due regard for other stakeholders including lenders, employees, communities, customers, suppliers, regulators and the environment. Analysing how companies deal with all their stakeholders provides vital clues to a company’s long-term viability.

Myth 3: Engaging is about escalating

Engaging is not just about escalating. Relationship building is essential for holding companies to account and stewardship activity can focus on both fact-finding and change facilitation. Fact-finding involves seeking additional understanding and gaining insights about business models. This is complemented by “change facilitation” engagement, where it aims to effect meaningful change within the company as a result of identifying weaker practices or emerging risks. Nevertheless, there is a process for escalation, and we escalate where necessary.

Myth 4: Divestment is the only way to affect real change

Divestment is sometimes quoted as the only way in which real change can be achieved, particularly regarding issues like climate change. Divestment can be a powerful tool for active managers but should not be used lightly. One alternative is engagement and stewardship, in other words managing the existing holdings rather than exiting our positions in the face of the first issue that arises. This is especially relevant where the holdings may pass into the hands of other, potentially uninformed and disengaged, investors.

Myth 5: Voting against company management as the only proof of engagement

Voting against company management and the tendency to view this strictly as the only proof of an engaged investor are two other common misconceptions. In fact, it is about holding management and board to account to ensure they are managing the business for the long term. Although these are ways of escalation, voting against management typically follows engagement that has not achieved the desired outcome and there is no indication that it will.

Myth 6: Sustainable investment is not about stewardship

In practice, stewardship is a key component of sustainable investment. It is a way in which sustainability can be delivered. Sustainable investing can describe investment approaches that target a specific outcome such as excluding tobacco from a portfolio, choosing companies that follow best practice or targeting concrete social and environmental objectives. But it also describes the process of overseeing companies and holding them to account, which is what active ownership and stewardship is all about. This is the way in which sustainable business practices can be promoted across the spectrum and not only for those companies that are part of a concrete environmental or social strategy.

What are the myths telling us?

Turning the six myths around, our experience in practicing stewardship has taught us the following six truths:

  1. Stewardship is an integral part of investment and not a box-ticking exercise.
  2. Stakeholder interests play a big part in companies’ ability to deliver long-term value.
  3. The foundation of effective stewardship is regular, non-confrontational communication with companies.
  4. Divestment will occur if it is in clients’ best interests but there are many, potentially value-creating, ways to escalate concerns before it comes to that.
  5. Voting against management is an indication that preceding engagement has been rather ineffective.
  6. Stewardship is an integral way to implement sustainability.

Stewardship codes help to indicate best practice. However, it is not a guarantee for effective or successful investment outcomes. Analysis of the fundamentals is more reliable in this respect.

 

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