Stewardship: a coming of age

Investor stewardship is coming of age. Historically it has focused on encouraging disclosures and improvements in corporate governance. Critics might suggest that often this has led to company boards who have been risk averse in their capital allocation and virtue signalling in the way they have sought to meet the myriad of increasing investor demands, particularly around sustainability. As the climate and technology disruptions continue to relentlessly manifest, companies – to be relevant for the future – will need to invest and the returns of those investments will be far from certain. As a result, investor stewardship will need to evolve and rather than act as a brake on investment in the risk averse way they hold company boards accountable, will need to work collaboratively with boards and empower them to invest for sustainable and profitable growth.

Whilst well intentioned, if the continued trends – particularly in Europe – in sustainable investing regulation continue, they will not only not achieve their goal of combating greenwashing, they will stifle investment in the green economy. For example, the development and implementation of sustainable investing labels will lead to significant reporting burdens for investment managers. Yet due to the inherent subjectivity of what sustainability is, these are unlikely to clarify to a retail or institutional investor what they are investing in and equally unlikely to lead to the desired change in companies’ investment behaviour. Unintended side effects will also include restricted investment universe, which are not in investors’ interests. Aims to regulate investor stewardship in a prescriptive way will turn it into a box-ticking exercise and blunt its effectiveness. Instead, investment managers should retain some freedom and ability to narrate what they do and be held accountable by their clients for how effective they are.