Investor stewardship in an uncertain world: complexities and surprises

For an ever-growing number of investors, investor stewardship – the responsible allocation of capital and purposeful engagement – stands at the heart of their investment practices. What it precisely means, however, to be an effective steward of capital is hardly a settled matter. Recent years have seen soft-law principles of investor stewardship continue to develop in the UK and abroad and the introduction of an increasing number of regulatory initiatives (often without specifically using the term stewardship) that aim to foster the efficient inclusion of sustainability in investment management and corporate governance.

stewardship is becoming the global mantra and measure of long-term value

By 2020 a total of 35 stewardship codes have been issued across 20 jurisdictions on six continents.[1] Today, three more stewardship codes (in the broad sense)[2] have been released in Brazil, Russia and Taiwan and stewardship initiatives have been introduced in Germany and are currently negotiated in other jurisdictions. In addition, stewardship principles have been developed at international and regional levels.[3] Investor stewardship has, therefore, become truly global. Whether it is index funds in the US, active and passive asset managers in the UK, retail investors in France, local pension funds in South Africa or the National Pension Service in South Korea, stewardship is becoming the global mantra and measure of long-term value. But, at the same time, breeding and exercising investor stewardship effectively is becoming very complex.

At the beginning of the stewardship policy movement, stewardship codes and principles had a simple aim: to encourage shareholder engagement with investee companies and turn passive institutional shareholders into active stewards. Investor stewardship was originally about “shareholder stewardship”, that is the stewardship responsibilities of institutional investors (mainly asset managers and asset owners but sometimes service providers too) as shareholders of public companies. The UK was the first country to introduce a Stewardship Code in 2010 (revised in 2012) with the aim to promote the so-called “micro-level” shareholder stewardship and integrate shareholder monitoring and engagement into investment management. This very simple idea of an “engaged steward” travelled very successfully around the world in the 2010s and the Stewardship Codes seen around the world are strikingly similar to the UK “gold standard” of stewardship. This global diffusion of the UK model of shareholder stewardship came as the first surprise to comparative law scholars. Outside the UK, the problem the UK Code 2012 aimed to solve does not exist and the “gold standard” of shareholder stewardship is inherently unattainable due to differences in local legal infrastructures, ownership structures, and cultural barriers.  

stewardship is becoming relevant for both active and passive strategies and has a role to play in “greening” investment management externally

A second surprise, at least for some, came with the recognition that that the model of micro-level shareholder stewardship was unachievable on a large scale due to the incompatibility of existing business models with firm-specific engagement. In the UK, this weakness was translated into the revised 2020 Stewardship Code which expands stewardship both in terms of aims and targets. First, stewardship is not viewed anymore monolithically as a corporate governance tool to awake passive investors. Rather investor stewardship is becoming relevant for both active and passive strategies and has a role to play in “greening” investment management externally and enhancing the accountability across the investment chain (from asset managers to asset owners and from asset owners to beneficiaries and members). Secondly, stewardship is not only about public equity and firm-level engagement. Rather investor stewardship is taking place at different levels and across different assets (including fixed income and real estate) and even includes engagement with policymakers and other standard setters. To the surprise of many market participants, instead of discarding stewardship in the trash bin of policy history, investor stewardship became more complex in terms of both aims and targets.   

For a comparative law scholar, a critical question to be asked is whether a diffusion 2.0 of the “expanded” stewardship model likely to take place? The newer iterations of stewardship codes in Japan and Singapore and the draft South Africa code offer perhaps some room for optimism for the diffusion of sustainability-related principles as the 2020 UK Code aligns better with investment models. Yet a diffusion 2.0 may not be needed as investor stewardship has started to become embedded in local markets and business models.

current systemic risks pose significant challenges for stewards-to-be investors

Rolling out flexible and local-conscious policies and codes is one thing; how the envisaged stewards (ranging from asset managers to asset owners, and from service providers to controlling shareholders or even retail investors) is another. And, current systemic risks pose significant challenges for stewards-to-be investors. When the “stewardship movement” took shape, few could have predicted the uncertainties to come in the following years. Society at large has faced significant challenges including the Covid-19 pandemic and other health risks, climate change and environmental risks (including biodiversity and deforestation), supply chain disruptions, tech risks, geopolitics (including the armed conflict in Ukraine) and the ever-increasing demand to tackle economic and social inequalities. All these uncertainties entail a variety of risks, from environmental geo- and socio-political, a common trait is the systemic nature of the risk they present.

As the investment industry continues to grapple with these risks and challenges in the background of the much broader debate about climate change, stewardship by all providers of capital is becoming fundamental to reconcile finance with a sustainable and socially fairer economy. It is here that we may find another surprise awaiting us. Investor stewardship was developed in the Anglo-American context to be the solution to a problem that is not shared globally; but it may reveal itself as the solution – at least in part – to truly global problems of climate change and sustainability.

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By Dr Dionysia Katelouzou, a Reader in Corporate Law at The Dickson Poon School of Law, King’s College London and Associate Editor of the ECGI Blog.

This article reflects solely the views and opinions of the authors. The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.