The evolution of investor stewardship and the importance of aligning stewardship metrics, targets and outcomes 

By Professor Anna Tilba, November 2024

On 30 April 2024 I had the privilege of speaking at a conference focusing on the theme of ‘The Varieties of Investor Stewardship’ in King’s College, London. The conference focused on promoting dialogue and collaboration among different stakeholders such as asset managers, asset owners, service providers, activist investors, investor associations, policymakers, legal firms and NGOs, aiming to illuminate the state of the art in the practice of stewardship – and where it’s heading amidst a changing UK political and economic landscape. 

In my opening statement for the panel session, I chaired on ‘Varieties of Different Metrics, Targets and Outcomes in Stewardship’, I noted that this event highlights a pivotal moment in our journey towards a more meaningful stewardship.  

Over the past 15 years I’ve seen a profound change in the way we perceive stewardship – in particular how both UK asset managers and asset owners approach stewardship and engagement. For example, when I was carrying out my PhD research in UK investor stewardship practices nearly two decades ago, there was only a handful of asset owners who considered investor stewardship as an important element of trustee fiduciary responsibility to act in the best long-term interests of pension fund members. This meant not only looking at financial factors, but also non-financial factors. At that time, most asset managers were saying that their investment mandates were primarily focused on generating financial returns with frequent, quarterly evaluations of this performance. Stewardship was a desired but not a required option.  

Fast forward to the present, and our recent research for the UK Financial Reporting Council into the Influence of the UK Stewardship Code on investor stewardship practices and reporting revealed that now most asset owners, like pension funds, require their investment fund managers to be either signatories to the UK Stewardship Code or its international equivalent, and they also regularly report on how they discard their stewardship responsibilities. There’s no doubt that stewardship and engagement is now firmly at the top and not the bottom of the investment agenda.  

The meanings and issues of stewardship have also changed over time. 15 years ago, investor engagement focused primarily on governance issues such as executive remuneration and board composition with largely retrospective reporting on voting. Now these issues encompass broader environmental and social issues with focus on real outcomes. 

The methods of stewardship have also changed to include now not only engagement with equities but looking at other asset classes and having more engagement with policymakers and the regulators on systemic issues. There’s also a growing significance of collaborative stewardship on thematic issues via initiatives such as The Stewardship Code, PRI, TCFD, Climate Action 100+, and the Paris Aligned Investment Initiative, to name a few.  

Despite progress made in this area, challenges still remain. There is still a tension: while systems stewardship is a popular notion, investment fund manager mandates continue to prioritise financial or investment materiality over environmental and social issues.  

The focus on ‘comply or explain’ that’s governed our approach to stewardship reporting for many years has served its purpose in promoting transparency, however, it’s also often fallen short in fostering genuine accountability. It’s allowed room for mere compliance without true commitment, often resulting in a lack of meaningful change. 

A shift towards ‘apply and explain’ in stewardship reporting has brought with it a collective recognition that true stewardship extends beyond mere adherence to regulations. It demands proactive engagement, ethical decision-making and a genuine commitment to long-term value creation where investors and companies are encouraged to articulate not just what they do, but why and how they do it. 

With that comes a proliferation of views on what successful stewardship looks like and how to both achieve and resource it. Demonstrating tangible improvements and changes is still a challenge. More stewardship and engagement doesn’t necessarily mean better outcomes. In other words, appearance of stewardship doesn’t mean there’s a real substance of stewardship leading to a meaningful change. There’s also a lack of agreed standards on stewardship and problems with data quality and a multitude of competing reporting initiatives.  

In this context there’s a growing need to better align stewardship metrics, outcomes and success measures across global stewardship initiatives. Meaningful stewardship requires a deeper understanding of the various metrics, targets, and outcomes that drive it. 

Metrics serve as a compass, guiding investors in assessing the performance and impact of stewardship. They encompass a wide range of quantitative and qualitative indicators, from financial returns to environmental, social, and governance criteria. By analysing these metrics, we can gain insights into the risks and opportunities inherent in our investment portfolios. 

Targets, on the other hand, provide us with a roadmap for action. They delineate the specific objectives we aim to achieve within a given period, whether they be reducing carbon emissions, enhancing diversity and inclusion, or fostering ethical governance practices. Setting clear and measurable targets not only aligns our investment strategies with our values but also holds us accountable for our actions. 

However, it’s the outcomes that truly matter – the tangible results that our investments yield in terms of social and environmental impact. While metrics and targets provide us with essential benchmarks, it’s the outcomes that determine the effectiveness of our stewardship efforts. Whether it be driving positive change in communities, mitigating climate change or promoting sustainable economic development, our success as stewards of capital is measured by the real-world impact we achieve.  

Overall, a better aligned approach to stewardship enables not only effective monitoring of progress but also facilitates accountability and transparency in achieving desired outcomes. Ultimately, the synergy between metrics, targets and outcomes serves as a catalyst for responsible stewardship, driving positive change and fostering long-term value creation for both investors and society at large.