The investor network has issued recommendations for policymakers to create an “enabling environment” for stewardship activity.
The Principles for Responsible Investment’s (PRI) newly released implementation guidance for policymakers aims to “connect the dots” between stewardship tools across jurisdictions, according to Margarita Pirovska, PRI’s Director of Policy.
The new guide recommends policymakers establish regulatory frameworks for effective stewardship to ensure it aligns with investors’ duties to their clients or beneficiaries, and to facilitate it as a tool to support public policy objectives.
Both are key in supporting greater collaborative engagement between investors on stewardship, as well as boosting global alignment between stewardship policies and other sustainable investment policies, such as taxonomies, corporate ESG disclosure and investor ESG regulations, the PRI guide noted.
“Stewardship is a broader foundational policy,” Pirovska, the guide’s co-author, told ESG Investor. “It’s about active ownership, about how investors engage with not just investee companies, but more broadly with the market around them to achieve their purpose.”
The role of stewardship
The PRI’s guide recommends that financial policymakers and regulators should “ensure that stewardship is not treated as an investment activity suitable only for some purposes or for specific asset classes”.
It instead noted that policies should “consistently promote the appropriate use of stewardship by investors as part and parcel of discharging their duties”.
The recommendations are comprised of an initial policy scoping phase – through which policymakers need to determine what stewardship codes, standards and regulations already exist, and to what extent policies and regulations support or hinder effective stewardship – followed by a policy design phase, and then an implementation, monitoring and review phase.
The investor network highlighted that stewardship could play a role in restraining short-termism and encouraging long-term investment to support the sustainable growth of the real economy and enhance overall financial market stability, creating an enabling environment for delivering real-world sustainability outcomes and “addressing the challenge of collective action”.
Some of the key measures set out by the PRI to enhance accountability and transparency for stewardship activities include setting out key elements of stewardship responsibilities, requiring the incorporation of ESG factors in stewardship processes and decisions to support the long-term value of investments and clarifying the responsibilities of the board and senior management to oversee and provide sufficient resources for stewardship activities.
“It’s really important to clarify investor rights, legal processes, and mechanisms to reduce barriers for investors and encourage them to engage in stewardship activities,” Pirovska said, adding that improvements to the infrastructure for stewardship, such as platforms for collaborative engagement and a voting system that is neutral to different ways of voting, could also encourage more effective engagement activities.
She highlighted the importance of stewardship tools, such as shareholder resolutions and voting engagement, and how investee companies can be monitored. Pirovska also underlined the importance of removing technical barriers around those stewardship tools and “creating the infrastructure for investors to engage collaboratively”.
Next stewardship steps
The guide also highlights areas of stewardship that will likely see a greater emphasis in the future. These areas included public policy engagement where investors are encouraged to influence the policy landscape that they and their investee companies are operating within, and synergies between stewardship policy and other sustainable investment policies.
It also spotlighted stimulating collaborative engagement through the support of investor platforms or forums dedicated to address collective action problems, and clarification of the legality of collaborative engagement or provision of safe harbour clauses to reduce investor concerns.
Pirovska also underscored the importance of collaborative engagement, but noted potential competition law issues potentially impacting the activity.
Clarity of safe harbour has been provided to UK companies collaborating on the development of transition plans by the Financial Conduct Authority (FCA) and achieving environmental goals by the Competition and Markets Authority (CMA), but there is a lack of clarity for investors on collaborative engagement, according to Pirovska.
In some markets, there is uncertainty as to the extent to which investors are able to engage collaboratively in line with competition laws.
Pirovska suggested policy reforms are needed to “ensure that investors can collaborate on pressing issues like climate change” with existing regulatory frameworks built for a “pre-Paris Agreement era”.
The PRI’s guide also said there will likely be greater emphasis on implementation and greater scrutiny of the actions that investors are taking over stewardship.
This is likely to include requirements for investors to produce regular reports on their stewardship activities, increased scrutiny of these reports by regulators or oversight bodies, and the introduction of minimum requirements in order for investors to be recognised as having fulfilled their stewardship responsibilities, the PRI noted.