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Investment - Investor Engagement and Stewardship
Stewardship is often used as an overall word embracing the approach that investors adopt as active and involved owners of the firms and other entities in which they invest through voting and engagement. The name ‘steward’ is derived from two old English words — ‘stig’, meaning house, and ‘weard’, meaning guard. What in the Middle Ages referred to protection of the home, in the 21st century can apply to the protection of financial assets. The steward is the representative of the owner, responsible with acting in the owner’s interests and producing returns and long-term value from their assets.
Fiduciary duty is a requirement by the person (fiduciary) to look after another person’s assets, and they must attempt to maintain and increase the value of the assets with which they have been charged so that they are able to restore them in good order to their owner. As a steward is the representative of the owner, caring for assets on their behalf, the steward is tasked with fiduciary duty.
Shareholder involvement is the means in which investors put into effect their stewardship obligations in keeping with the second principle from the Principles for Responsible Investment (PRI), which states:
‘We will be engaged owners and incorporate environmental, social, and governance (ESG) issues into our ownership policies and practices’.
Stakeholder involvement is sometimes described as purposeful discussion with a specific objective in mind. That purpose will vary every investment, but often relates to improving companies’ business processes, notably in relation to the management of ESG issues.
Given its focus on protecting and enhancing long-term value on behalf of the asset owner, engagement can span a vast range of issues that affect the long-term worth of a firm, including the following:
Strategy
Capital structure
Operational performance and delivery
Risk management
Pay
Corporate governance
ESG elements are crucial to these challenges. Opportunities and challenges afforded by ESG changes need to be incorporated in a business’s strategic thinking. A complete review of operational success must involve not only financials, but also critical areas essential to the company’s stakeholders:
The long-term health of the firm, such as interactions with the workforce
A culture that supports long-term value generation
Dealing freely and fairly with suppliers and consumers
Having sufficient and effective environmental controls in place
An awareness of the whole range of significant risks facing a firm will always include ESG factors, and investors will want to engage with companies on this basis.
Engagement Dynamics
In a 2018 report, PRI outlined three ESG engagement characteristics that it believes create value:
Communicative dynamics (the sharing of information)
Learning dynamics (improving knowledge)
Political dynamics (creating relationships)
Developing these dynamics needs investors to go beyond a financial understanding of the firm and its actions. Unless the steward attempts to develop communication and relationships and has a desire to learn, engagement is unlikely to be successful.
To be successful in engagement, investors need to respect the specific conditions of the company, seeking knowledge and rapport rather than just proclaiming that business practices need to change.
Benefits of Stewardship and Engagement
Stewardship and participation are important because they boost shareholder value and support investors in the performance of their fiduciary obligation. When done correctly, stewardship and engagement foster better information flows between investors and investees as the parties discuss and debate business-related issues.
This flow allows them to learn from each other and to create a connection, but most crucially to encourage change when shareholders convey their thoughts on major difficulties that the firm is facing.
Engagement helps organizations understand their investors’ (and potential investors’) expectations, allowing them to modify their long-term strategies accordingly to fit them. Engagement also enables companies to explain how their approach to sustainability links to their overall business strategy and provides an opportunity for corporations to remark on grades or scores determined by frameworks that they may believe do not reflect the complexity of an issue.
Engagement also allows investors to work closely with a company over time on specific governance, social, or environmental concerns that the investor perceives as posing a downside risk to the business. By interacting with companies’ management — either individually or collectively — investment firms are able to push corporations to adopt better ESG practices, or at least to relinquish problematic practices.
Effective Engagement
If involvement is to be effective in achieving change results, it needs that a clear objective is set from the start. The Investor Forum – a UK association set up to encourage collective conversation between investors and investees — explains involvement as follows:
‘Engagement is active discussion with a particular and targeted objective.… The underlying aim…should always be to protect and enhance the value of assets’.
Characteristics of effective engagement include the following:
Focus on long-term value preservation and creation
Framed by a comprehensive understanding of the nature of the company and drivers of its business model
Recognition that change is a process and should not be unnecessarily rushed
Consistent, clear, and honest messages and dialogues
Resourced correctly so that it may be delivered professionally
Resourced efficiently
Ongoing reflection so that lessons are gained to better future engagement activities
There are occasions in which engagement compels an investor to have a view. These instances include corporate acts, such as share issuances in which the investor can choose to participate or not, and planned takeovers in which the investor must decide whether to sell or to hang on to their shares.
Voting
Voting is one part of stewardship engagement and tends to focus on corporate governance problems highlighted at shareholders’ meetings. Voting normally occurs yearly at the annual general meeting (AGM) and occasionally in between at special sessions called extraordinary general meetings (EGMs).
questions considered for vote include frequently fundamental questions like the organization of the board, audit and oversight, CEO remuneration, and the capital structure of the company. Considering such matters with due care is part of fiduciary duty, and appropriate care may often demand active communication with the corporation to grasp the issues and convey any concerns and opinions.
Engagement Styles
Engagement styles differ depending on the legacy of stewardship teams. There is a distinction in thinking and strategy between investment teams with a history of governance-led involvement and those that have worked more on the environmental and social side. As material E and S concerns come from the nature of a company’s business activities, teams with this background tend to be organised by sector.
Such teams tend to focus on individual environmental and social issues and to pursue them strongly across sectors or the market as a whole. Because governance is determined more by national law and norms, firms with a governance legacy tend to focus on particular enterprises.
The beginning point for passive investors is often a particular issue and they attempt to engage with all companies impacted by that issue.
Active investors start with a company and its business difficulties and design a bespoke involvement approach cutting across a range of issues.
Issue-based methods to involvement are generally complemented with examples of best practices in a given area. By expecting all companies in a given sector to embrace certain best practices, investors may over time shift overall sector or industry practice advances.
firm-focussed engagement tries to improve practice across a number of important ESG issues at a particular firm – the purpose is to boost performance of the portfolio overall, both in terms of ESG performance and investment performance.
" " Used successfully, engagement can be a conduit for positive outcomes. It can be carried out throughout the complete range of financial asset types. The ideas and mindset of involvement and stewardship need to be applied with good reason and discretion to the diverse conditions and the levers that the investor controls.
Stewardship is often used as an overall word embracing the approach that investors adopt as active and involved owners of the firms and other entities in which they invest through voting and engagement. The name ‘steward’ is derived from two old English words — ‘stig’, meaning house, and ‘weard’, meaning guard. What in the Middle Ages referred to protection of the home, in the 21st century can apply to the protection of financial assets. The steward is the representative of the owner, responsible with acting in the owner’s interests and producing returns and long-term value from their assets.
Fiduciary duty is a requirement by the person (fiduciary) to look after another person’s assets, and they must attempt to maintain and increase the value of the assets with which they have been charged so that they are able to restore them in good order to their owner. As a steward is the representative of the owner, caring for assets on their behalf, the steward is tasked with fiduciary duty.
Shareholder involvement is the means in which investors put into effect their stewardship obligations in keeping with the second principle from the Principles for Responsible Investment (PRI), which states:
‘We will be engaged owners and incorporate environmental, social, and governance (ESG) issues into our ownership policies and practices’.
Stakeholder involvement is sometimes described as purposeful discussion with a specific objective in mind. That purpose will vary every investment, but often relates to improving companies’ business processes, notably in relation to the management of ESG issues.
Given its focus on protecting and enhancing long-term value on behalf of the asset owner, engagement can span a vast range of issues that affect the long-term worth of a firm, including the following:
Strategy
Capital structure
Operational performance and delivery
Risk management
Pay
Corporate governance
ESG elements are crucial to these challenges. Opportunities and challenges afforded by ESG changes need to be incorporated in a business’s strategic thinking. A complete review of operational success must involve not only financials, but also critical areas essential to the company’s stakeholders:
The long-term health of the firm, such as interactions with the workforce
A culture that supports long-term value generation
Dealing freely and fairly with suppliers and consumers
Having sufficient and effective environmental controls in place
An awareness of the whole range of significant risks facing a firm will always include ESG factors, and investors will want to engage with companies on this basis.
Engagement Dynamics
In a 2018 report, PRI outlined three ESG engagement characteristics that it believes create value:
Communicative dynamics (the sharing of information)
Learning dynamics (improving knowledge)
Political dynamics (creating relationships)
Developing these dynamics needs investors to go beyond a financial understanding of the firm and its actions. Unless the steward attempts to develop communication and relationships and has a desire to learn, engagement is unlikely to be successful.
To be successful in engagement, investors need to respect the specific conditions of the company, seeking knowledge and rapport rather than just proclaiming that business practices need to change.
Benefits of Stewardship and Engagement
Stewardship and participation are important because they boost shareholder value and support investors in the performance of their fiduciary obligation. When done correctly, stewardship and engagement foster better information flows between investors and investees as the parties discuss and debate business-related issues.
This flow allows them to learn from each other and to create a connection, but most crucially to encourage change when shareholders convey their thoughts on major difficulties that the firm is facing.
Engagement helps organizations understand their investors’ (and potential investors’) expectations, allowing them to modify their long-term strategies accordingly to fit them. Engagement also enables companies to explain how their approach to sustainability links to their overall business strategy and provides an opportunity for corporations to remark on grades or scores determined by frameworks that they may believe do not reflect the complexity of an issue.
Engagement also allows investors to work closely with a company over time on specific governance, social, or environmental concerns that the investor perceives as posing a downside risk to the business. By interacting with companies’ management — either individually or collectively — investment firms are able to push corporations to adopt better ESG practices, or at least to relinquish problematic practices.
Effective Engagement
If involvement is to be effective in achieving change results, it needs that a clear objective is set from the start. The Investor Forum – a UK association set up to encourage collective conversation between investors and investees — explains involvement as follows:
‘Engagement is active discussion with a particular and targeted objective.… The underlying aim…should always be to protect and enhance the value of assets’.
Characteristics of effective engagement include the following:
Focus on long-term value preservation and creation
Framed by a comprehensive understanding of the nature of the company and drivers of its business model
Recognition that change is a process and should not be unnecessarily rushed
Consistent, clear, and honest messages and dialogues
Resourced correctly so that it may be delivered professionally
Resourced efficiently
Ongoing reflection so that lessons are gained to better future engagement activities
There are occasions in which engagement compels an investor to have a view. These instances include corporate acts, such as share issuances in which the investor can choose to participate or not, and planned takeovers in which the investor must decide whether to sell or to hang on to their shares.
Voting
Voting is one part of stewardship engagement and tends to focus on corporate governance problems highlighted at shareholders’ meetings. Voting normally occurs yearly at the annual general meeting (AGM) and occasionally in between at special sessions called extraordinary general meetings (EGMs).
questions considered for vote include frequently fundamental questions like the organization of the board, audit and oversight, CEO remuneration, and the capital structure of the company. Considering such matters with due care is part of fiduciary duty, and appropriate care may often demand active communication with the corporation to grasp the issues and convey any concerns and opinions.
Engagement Styles
Engagement styles differ depending on the legacy of stewardship teams. There is a distinction in thinking and strategy between investment teams with a history of governance-led involvement and those that have worked more on the environmental and social side. As material E and S concerns come from the nature of a company’s business activities, teams with this background tend to be organised by sector.
Such teams tend to focus on individual environmental and social issues and to pursue them strongly across sectors or the market as a whole. Because governance is determined more by national law and norms, firms with a governance legacy tend to focus on particular enterprises.
The beginning point for passive investors is often a particular issue and they attempt to engage with all companies impacted by that issue.
Active investors start with a company and its business difficulties and design a bespoke involvement approach cutting across a range of issues.
Issue-based methods to involvement are generally complemented with examples of best practices in a given area. By expecting all companies in a given sector to embrace certain best practices, investors may over time shift overall sector or industry practice advances.
firm-focussed engagement tries to improve practice across a number of important ESG issues at a particular firm – the purpose is to boost performance of the portfolio overall, both in terms of ESG performance and investment performance.
" " Used successfully, engagement can be a conduit for positive outcomes. It can be carried out throughout the complete range of financial asset types. The ideas and mindset of involvement and stewardship need to be applied with good reason and discretion to the diverse conditions and the levers that the investor controls.
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