Association calls for ‘comply-or-explain’ policing of stewardship codes, more prominent role for ESG.
Awareness of stewardship codes is low among institutional investors in the APAC region, according to a new report from the CFA Institute. Local codes would be more effective if they were more rigorously enforced and principles based, said the association, as well as including sustainability and ESG principles more prominently.
According to the report, ‘Stewardship 2.0’, less than half of investors (47%) consider stewardship principles when making investment decisions. Four in ten (42%) rated themselves as having little or no understanding of stewardship codes in the markets in which they invest, while only 28% said they understood them well or very well.
The CFA Institute emphasised the need for a better understanding of the long-term value creation benefits of stewardship, and the role stewardship codes can play in promoting sound investment governance practices and in the advancement of ESG principles.
A lack of clarity on the link between engagement and value creation (38%) and high costs (36%) were cited most frequently as obstacles to implementing stewardship by survey respondents. To increase awareness, 62% of investors said a regulatory body should be mandated to enforce stewardship codes. Almost half (49%) believed that a comply-or-explain model provided a sufficient level of oversight and enforcement.
The report acknowledged that the effectiveness of engagement can be limited in certain markets in the region by high levels of ownership concentration and low levels of institutional ownership in public companies, which reduces investors’ motivation to engage in stewardship activities.
The CFA Institute called for the adoption of principles-based stewardship codes, enforced on a comply-or-explain basis, with more effective monitoring of compliance. The association also recommended prominent inclusion of sustainability and ESG in stewardship codes, promotion of codes by local regulators and industry bodies, establishment of global best practices, and a more proactive approach by asset owners.
“What is needed is an ongoing, transparent process of engagement with issuers to improve operating and financial performance, devote a higher level of attention to material ESG factors, to bolster confidence in markets and provide a clear linkage between implementation of stewardship principles with positive outcomes that can accelerate value creation,” said Mary Leung, CFA, head of advocacy, Asia Pacific, CFA Institute.
The CFA Institute surveyed 270 CFA charter holders from eight APAC countries, in a range of roles, from investors to regulators.