Fast reading
- Stewardship must be carried out in line with the long-term financial interests of the investor, considering all relevant performance factors, including social and environmental when material.
- To engage effectively with a company, stewardship professionals need to bring a solid understanding of how the business works, as well as a familiarity with the market in which it operates.
- Driven by investor need and long-term financial interest, best practice and policy engagement complements corporate engagement in enhancing long-term investment returns.
EOS was formed two decades ago with the aim of helping our clients improve the long-term fundamental performance of their investment portfolios through engagement with companies and policymakers, aligning their decisions and the outcomes they achieve with investors’ long-term financial interests.
Back then, stewardship focused on good corporate governance and value-creating capital allocation, with environmental and social concerns addressed by thematic, so‑called Socially Responsible Investment (SRI) funds. Today, environmental and social issues have rightly become mainstream, and when relevant and financially material, they can drive the success of the wider economy as well as the performance and capital allocation decisions of a company.
Due to increasing polarisation in many societies and the potential impact of climate change and technology on jobs and household budgets, sustainability – particularly ‘ESG’ – has become politicised. The resulting turbulence underscores how important it is for all in the investment chain to remain focused on fiduciary duty and the long-term financial interest of the investor.
Practically, this means driving real world change to help companies perform across different business cycles, regardless of the political backdrop of the day. Environmental and social issues will likely be an integral part of this picture.
For example, the transition to a low carbon economy presents risks and opportunities for multiple sectors. For a universal owner widely invested in the economy, fulfilling fiduciary duty is also about engagement on sector best practice and with policymakers. The aim is to address systemic risks and incentivise the private sector to further the societal and environmental goals so crucial to the financial wellbeing of the end investor. But to do so, policy engagement and advocacy has to be driven by investor need and long-term financial interest, not politics or culture wars.
Purposeful, business-oriented corporate governance provides the crucial foundation for company boards to take decisions – hence its importance to stewardship.
Action versus disclosure
In 2025 and beyond, policy, best practice and company engagement will necessarily evolve to be more action-oriented and complementary. Arguably, stewardship and regulation has over-focused on disclosure rather than purposeful governance and real-world outcomes – now we need to move towards action.
To engage effectively with a company and respect its limitations, stewardship professionals will need to bring a solid understanding of how the business works, as well as a familiarity with the market in which it operates. Without this knowledge, there is a danger of promoting box-ticking solutions for board composition, executive remuneration, and environmental and social considerations. The focus should remain on the fundamental performance of the business and not short-term market valuations.
Two decades ago, poor corporate governance often misdirected capital allocation as company boards went about building business empires rather than achieving financial returns. But a focus solely on disclosure and better corporate governance has prompted some company boards to become risk averse in their capital allocation. Purposeful, business-oriented corporate governance provides the crucial foundation for company boards to take decisions – hence its importance to stewardship.
As the climate and technology disruptions relentlessly manifest in the economy, companies will need to invest to be relevant for the future, and the returns of those investments will be far from certain. But those companies that do nothing will most likely fail. As a result, investor stewardship will need to evolve, working collaboratively with boards, and empowering them to invest for responsible and profitable growth.
Maybe universal asset owners can help to drive a cultural change in the industry, as they have the power to set investment management mandates that acknowledge systemic risks across portfolios. Effective stewardship should be a key part of those mandates.
EOS 2024 Annual Review
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