Responsible Investment: Making a Difference Through Stewardship

Responsible investment has increased dramatically in prominence over recent years. There are many drivers of this increase, including extreme weather events and corporate scandals, greater media profile, growing recognition that environmental, social and governance matters can impact financial returns, as well as increased regulation across a number of areas – including fund managers and financial advisors.

There are a range of ways in which investors can ensure they are investing responsibly. However, one strand that is common to all approaches is the need for investment managers to demonstrate (and be held accountable for) stewardship of their clients’ assets.

"Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society."

This definition, adopted by the FRC in its revamped UK Stewardship Code, is perhaps broader and more far reaching than what many would consider to be stewardship. Yet it reflects two important goals: long-term value creation and a recognition that companies and assets exist within broader social and environmental systems. For long-term investors, the proper and sustainable functioning of these systems are as integral to the ability to derive return as the companies that operate within them.

Asset owners predominantly view stewardship through the lens of voting and engagement activity which, in many cases, is undertaken by asset managers acting as their proxy. Yet this lens is not particularly well focused, with some placing an emphasis on levels of activity, rather than outcomes, as measures of success. Consequently, there is a risk that asset owners do not properly engage with or understand the actions of their managers making it harder for them to be held to account. Consequently, there is a risk that asset owners do not properly engage with or understand the actions of their managers making it harder for them to be held to account.

One commonly considered measure is the extent to which asset managers vote against management recommendations. But is a manager who votes against management on 20% of occasions better or worse than a manager who votes against management on 30% of occasions? Without the context provided by an understanding of voting policies and the knowledge of individual resolutions, we cannot say.

We can, however, begin to explore trends in the data, for example, by considering whether managers are more or less likely to vote against management on particular issues. This provides greater insight and allows asset owners to develop their understanding of the stewardship activity that managers undertake on their behalf.

But the bigger question is ‘who’s looking out for employees’ and monitoring their retirement savings, performance and providers’ service on an ongoing basis? Are employers getting the best “bang for their buck” in a marketplace for defined contribution pension schemes that continues to develop?

HRIS view is that good stewardship can create and preserve value for companies and markets as a whole. Given this, we seek to ensure good stewardship across all our portfolios’ assets by:

• Integrating Responsible Investment across our model portfolio ranges and supporting our clients in evidencing this to their underlying clients.

• Considering managers’ ESG capabilities in manager selection, including preferring managers that are signatories to both the UN-sponsored Principles of Responsible Investment (PRI) and the UK Stewardship Code.

• Monitoring our underlying fund managers' approach to stewardship. 

• Regularly reviewing our investment portfolios to consider how our approach to responsible investment can evolve to meet our clients’ needs.