Rickard Nilsson, Head of Stewardship Success at Esgaia, considers how asset owners can maximise long-term impact at a time of regulatory uncertainty.

Capital markets play a key role in influencing resource mobilisation. At a time when political division is delaying needed policy action, investors find themselves at a crossroads over how to act amid regulatory uncertainty.

Capitalism is governed by existing hard and soft law. As intermediaries with obligations to clients and end-beneficiaries, institutional investors are bound to play by those rules. Trying to play a more ethical game in anticipation of a developing rule book will put an organisation’s competitiveness at risk.

How can investors position against this, and implement a stewardship strategy that maximises impact over the long term for both clients and society at large?

The purpose of investor stewardship

The investment stewardship ecosystem reflects a complex web of stakeholder relationships and interests. From the underlying assets and the institutions owning them to clients, civil society, and the public sector, a myriad of actors influence industry practices, norms and policies.

From an investor perspective, the stewarding of assets generally entails selecting a board of directors who in turn assign and oversee management for the strategy and daily running of the asset. Investors can then choose to monitor and engage the asset, e.g. to build trust and align on longer-term plans. Engagement dialogues also play an important role in setting expectations and as an accountability mechanism when performance is lacking.

As evidenced in literature, and by the experience of many investors, good management practices are not adopted by many organisations because of cognitive, knowledge, incentive and capability barriers. Unsurprisingly then, research suggests that successful investment stewardship can increase returns, lower risks, and empower real-world outcomes – but needs to become more effective to have the intended impact.

The current state

Historically, investment stewardship has focused on individual company performance, generally perceived as high-cost monitoring. Normally only investors with large stakes would have sufficient ‘skin in the game’ to engage with a firm and undertake restructurings that truly increase productivity and investment efficiency. Today, practices are changing with institutional investors representing the single largest category of investors in public equity markets, and with the majority of portfolio performance due to overall economic development.

Most institutional investors’ portfolios now consist of hundreds, if not thousands, of holdings. Therefore, it seems obvious that investment stewardship should focus on reducing non-diversifiable/ market-wide