Towards a Model of Enlightened Stewardship

Rickard Nilsson, Head of Stewardship Success at Esgaia, explores the route to a broader and more encompassing framework for asset owners and managers.

In the evolving landscape of responsible investment, stewardship has taken on increasing importance. Asset owner and manager approaches have been rooted in the traditional view of fiduciary duty, focused on maximising returns for clients and beneficiaries. However, as stewardship continues to evolve, a broader more encompassing framework is emerging, which seeks to balance immediate investor interests with long-term sustainability, benefiting a wider set of stakeholders. This article synthesises insights from contemporary research to offer perspectives on the future of investment stewardship.

A broader view of stewardship

Investors wield significant power that, if used correctly, can influence not only corporate performance but also societal outcomes. Traditionally, investment stewardship has focused on the active oversight and management of assets on behalf of clients and beneficiaries. However, with responsibilities that transcend immediate clients or beneficiaries, investors can act as stewards not only of financial assets but of the broader ecosystem in which they operate.

In a more stakeholder-centric system, stewardship is evolving to incorporate a broader set of responsibilities, extending to end-investors, investable assets, the economy, society and environment. Recent literature on the topic expands on the concept of fiduciary duty and acting on behalf of others and for the benefit of others. In this research, Dr. Dionysia Katelouzou, Reader (Associate Professor) in Corporate Law at King’s College London, explains that the others on whose behalf investor stewards act are not necessarily the same as the others they serve, or act for, marking a crucial yet underexplored observation.

Key components of enlightened stewardship

In her research, Dr. Katelouzou provides a multi-dimensional framework comprising four primary relationships:

Client stewardship: Focusing on immediate fiduciary duties to clients and beneficiaries;
End-Investor stewardship: Considering the broader interests of end-investors, such as pension holders and insurance policyholders;
Asset stewardship: Managing the physical or intangible assets (companies, real estate, etc.) to ensure long-term value creation; and
Sustainability stewardship: Ensuring that investment practices contribute positively to environmental and societal outcomes.

While each of these relationships has its own set of objectives, the framework argues for their integration. Institutional investors must balance the often conflicting needs of short-term financial returns with long-term sustainability goals, a balance that is increasingly emphasised in the industry and in standards development.

The investment stewardship ecosystem

To understand how this enhanced framework can operate in practice, it is crucial to consider the roles of various actors within the investment stewardship ecosystem. These actors contribute to shaping norms, policies, and practices in the investment world, influencing how stewardship is defined and executed. Below is a list of key participants in this ecosystem:

Asset owners, such as pension funds, insurance companies, and sovereign wealth funds, hold capital and allocate it to asset managers to invest on their behalf. They set investment policies and might include stewardship considerations in their mandates and oversight.
Asset managers manage investment portfolios on behalf of asset owners. They are responsible for making investment decisions and actively engaging with companies through voting and dialogue to influence corporate behavior.
Clients or beneficiaries benefit from the investments made by asset owners. They are the ultimate stakeholders, such as retirees, policyholders, or endowment recipients, whose interests are to be protected through effective stewardship and investment practices.
Index providers create and maintain indices that serve as benchmarks for institutional investors. By setting the criteria for inclusion in indices, they shape investment behaviour and can influence corporate behaviour.
Other industry stakeholders include various market participants such as corporations, stock exchanges, rating agencies, and analysts. They play a role in shaping market standards and practices, and often contribute to defining norms for corporate governance and sustainability reporting.
Non-governmental organisations (NGOs) and civil society groups advocate for responsible investment practices, transparency, and ethical corporate behavior. They often engage with asset managers and owners, pushing for stronger ESG standards, accountability, and long-term value creation.
Policymakers and standard setters include government bodies, regulators and other organisations that set and oversee the hard and soft law frameworks governing financial markets, corporate governance, and ESG practices. Their policies and standards shape how asset managers and owners incorporate stewardship into investment practices.
Proxy advisors provide research, analysis, and voting recommendations to institutional investors on corporate governance and sustainability issues. They influence how investors vote on key issues such as board composition, executive pay, and sustainability resolutions.
Proxy solicitation actors are intermediaries who help companies engage with shareholders to secure votes in favor of their positions during shareholder meetings. They may act on behalf of corporations or investors, facilitating communication and voting in corporate governance matters.

A shift from agency to stewardship

Historically, institutional investors have been viewed through the lens of agency theory, which emphasises the relationship between principals (asset owners) and agents (asset managers). This dyadic framework assumes that agents act in self-interest, with mechanisms in place to mitigate conflicts of interest. However, this model fails to account for the complex web of relationships in modern investment chains, where every participant may operate in various roles.

In theory, the agency costs of intermediation increases with each additional layer in the investment chain. These multi-layered agency relationships risk undermining the effective monitoring of investee companies, and can in turn result in reduced accountability and engagement, weakened overall governance and oversight mechanisms.

Compliance now and in the future

The relationships and overlapping stewardship roles in this ecosystem highlight the complexity in aligning the various interests involved, including financial returns for clients, liability matching, long-term benefits for end-investors, the interests of the asset itself, and broader sustainability stewardship. Looking forward then, as stewardship moves toward this more holistic approach, investors’ reporting and disclosures become crucial for clarity on stewardship objectives, engagement types, efforts and resulting outcomes.

A significant challenge is that, except for the relationship between an investor and their clients / beneficiaries, stewardship relationships are not captured by hard law. Here, stewardship codes can play a vital role in addressing these different types of relationships to help shape modern expectations on institutional investors.

These codes provide guidance and expectations on investors’ engagement with investee companies and other stakeholders to promote long-term value. The 2020 update of the UK Stewardship Code, for example, has played a critical role in helping shape modern expectations on institutional investors globally.

However, they also face limitations, such that most do not fully embrace this broader approach to stewardship. For instance, – probably not steer too far away from existing hard law – there is often a focus on materiality concerns and conflicts of interest, and less so on the consideration of long-term societal and environmental impacts of investments.

Encouragingly, consensus is growing to evolve these to better encourage investors to act as stewards of the broader ecosystem. Some friendly advice to authors of stewardship codes might be to explicitly define this concept, and work on expanding narrower notions of whom an investor ultimately exercises power for, who are currently not protected by hard law. This could increase the effectiveness and relevancy of these codes, and enable investors to fulfill fiduciary duties while protecting the commons on which portfolio returns depend.

Technology as an enabler for progress

Aiding in this development are also technological advancements that can help reshape the stewardship landscape. The rise of digital platforms and networked communication has made it easier for investors to engage with companies and other stakeholders in real time, and to collaborate more effectively. This shift is particularly positive from a sustainability perspective, where timely engagement on issues can be crucial for stakeholder accountability and action.

The role of technology here is not limited to just communication. With research suggesting investors spend 20 % of stewardship resources on reporting, technology can also help to increase resource effectiveness by reducing administrative burdens to unlock productivity gains, for example in data management and reporting practices.

A call to action

Institutional investors are increasingly called upon to address issues like climate change, social inequality, and corporate governance failures. However, the sheer complexity of these issues, combined with the diverse range of actors involved makes it difficult to implement a one-size-fits-all solution.

By enhancing stewardship expectations and practices, where investors continue to develop their tailored engagement strategies while advocating for this enhanced framework, we can empower both the long-term success of individual portfolio management but also contribute to the broader well-being of society and the planet.

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