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A crucial question arises: should investor stewards serve “others” when these “others” are not financially material, or when their impact extends into the real world?

In today’s fast-paced financial world, institutional investors play a pivotal role in shaping capital markets. Central to this influence is the concept of investor stewardship – a multifaceted term encompassing power, responsibility and commitment in managing assets on behalf of others. Despite ongoing debates about the roles and responsibilities of institutional investors and the increasing volume of literature on the topic, a critical gap persists: the lack of a comprehensive analytical framework for investor stewardship. This blogpost, drawing from ongoing research, aims to delve into the complexities of investor stewardship, unravelling a crucial, yet unexplored aspect – the concept of “others” for whom investor stewardship is exercised. 

While the term investor stewardship may be relatively recent, its historical roots stretch back to the Middle Ages and the Anglo-Saxon words stig (house or some part of a house) and weard (keeper), etymologically meaning “housekeeper” or “house guardian”. In scholarly literature, the term stewardship has long been associated with managerial roles, emphasising the responsibilities of managers. Shareholders, on the other hand, have predominantly been discussed as principals within the agency framework. However, institutional investors in their role as shareholders act as intermediaries, blurring the lines between principals and agents. This duality raises fundamental questions about accountability, responsibility, and fiduciary duty. 

As institutional investors navigate their roles as both asset-holders and intermediaries, investor stewardship embodies a complex interplay of power, responsibility and commitment. While not universally understood or legally defined, the essence of investor stewardship comprises three key elements: (i) the exercise of power by a steward, (ii) acting on behalf of others and, (iii) for the benefit of others. Unlike self-interested agents, stewards act for others rather than self, aligning with the stewardship theory of management. However, it is worth noting 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. 

In the context of investor stewardship in equity holdings, referred to as shareholder stewardship, shareholder engagement assumes a central role. Such engagement takes various forms, spanning from formal channels such as voting to more informal avenues such as private meetings. Asset managers  prevalent in many markets, spearhead most contemporary shareholder engagement efforts, often collaborating with peers to advocate for changes in corporate policies or practices or address environmental or social concerns. Shareholder engagement by institutional investors carries significant weight and influence over the boards of the companies in which they invest, as boards must carefully consider and respond to the perspectives and demands of these influential investors. However, what is often disregarded is that this shareholder power is wielded on behalf of others, emphasising the importance of substitution and delegation in stewardship relationships. 

Despite existing hard-law duties outlining institutional investors’ obligations to act on behalf of clients and beneficiaries, determining for whom shareholder power should be wielded remains elusive. The UK Stewardship Code 2020 provides a foundational framework, aiming to align the end investors with the well-being of investable assets, emphasizing principles of accountability, transparency, and long-term value creation. However, challenges persist, particularly concerning the integration of ESG factors and determining which “others” should be prioritised in case of conflicted interests. The UK Stewardship Code 2020 envisions stewardship that serves “others”. Yet challenges also remain in aligning stewardship parameters with the interests of ultimate beneficiaries in cases of delegated stewardship and third-party stakeholders, such as fellow shareholders, employees, customers or even broadly “the economy, the environment and society” (Principle 1 of the UK Stewardship Code 2020). 

As the landscape of investor stewardship continues to evolve, embracing a holistic understanding of stewardship relationships, responsibilities and objectives is imperative. For instance, a crucial question arises: should investor stewards serve “others” when these “others” are not financially material, or when their impact extends into the real world? This debate is ongoing, with arguments on both sides. 

Alignment with the currently defined hard-law duties for asset owners and asset managers would imply that the UK Stewardship Code 2020 solely endorses financially material ESG stewardship (alpha enhancement) and ESG stewardship leading to real impact which has some value in the long term (beta enhancement). However, the Code does not explicitly require or exclude stewardship addressing “intrinsic materiality”, which refers to activities generating real-world impact outcomes of a non-financial nature. 

A cautious reading of the UK Stewardship Code 2020 suggests that it does not unconditionally seek to internalise broader environmental and societal impacts of asset management in investment decisions. Instead, “the economy, the environment, and society” are warranted only if they meet certain criteria: (i) they are “material”, meaning they affect profitability and valuation of a specific asset/investment portfolio or they impact long-term market returns, and (ii) they do not undermine the interests of the investors’ clients and/or beneficiaries (Principles 4 and 7 of the UK Stewardship Code 2020). 

Clarifying the concept of “others” on whose behalf and for whom stewardship is exercised are imperative steps towards fostering a more inclusive and responsible investment ecosystem. Soft law frameworks have a key role to play in achieving this clarification. The anatomy of investor stewardship underscores the need for next-generation stewardship codes to solidify the concept of “others” – especially those, such as end investors and third-party stakeholders, who are not protected by hard law. This is a crucial gap to fill, as uncertainty about who the others are can give the investor steward good reasons to choose on whose behalf and for whom they act.



By Dionysia Katelouzou, King’s College London

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This article features in the ECGI blog collection Board of Directors

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