By Clara Melot, Specialist, Stewardship (Active Ownership 2.0), PRI
Stewardship functions are largely under-resourced. Investors must be prepared to pay more for stewardship, but how much more are we talking about and what is stopping them?
Inadequate resourcing is hindering stewardship efforts
As we start the new year, having hit a record for carbon emissions in 2022, it’s safe to say that too little progress has been made in the fight against climate change, and other systemic risks such as accelerating biodiversity loss and increasing social inequality are looming large too.
The corporate oversight function of good stewardship is well understood by responsible investors and increasingly recognised by regulators, but its role in addressing risks that directly or indirectly undermine the stability of our financial system and threaten investment returns is still underappreciated.
The potential of stewardship remains largely unfulfilled, not least because stewardship goals lack definition or ambition at times. But even investors that do recognise this role and want to use outcomes-focused stewardship to achieve their financial and sustainability goals soon hit a glass ceiling of sorts: the quantity of resources actually dedicated to stewardship.
There is a growing recognition among some in the industry that stewardship functions are under-resourced. For example, in 2019, WTW’s Thinking Ahead Institute found that while stewardship resources were increasing in absolute terms among the world’s six largest investment managers, this is neither commensurate with their asset growth nor their overall number of employees.
A recent UK Financial Reporting Council report exploring the impacts of the updated UK Stewardship Code found that a majority of investment managers surveyed expected a rise in staff and research budgets over the next two years. But are these increases enough to address the challenge at hand?
We need quality… and quantity
Investors are starting to acknowledge the importance of stewardship – in driving returns; increasing the resilience of our financial system; and – ultimately – in protecting and enhancing long-term value for beneficiaries. Consequently, some are broadening their approaches beyond actively managed listed equity holdings to maximise these benefits.
So why is the issue of adequate resourcing so often overlooked?
- cost-cutting efforts and the fact that the benefits of stewardship extend to other investors that have not spent resources (free riders);
- the diversity of investor needs means there is no agreed definition of what good stewardship resourcing looks like and no single metric to measure it; and
- the difficulty of capturing the variety of stewardship resources in a consistent way within an itemised budget.
Qualitative matters, such as management strategies, staff expertise and thematic engagement priorities, dominate current discussions around stewardship resources, largely because focusing on quality and efficient allocations is paramount to safeguard value and potentially achieve greater returns.
Discussions about the quantitative aspects of resourcing tend to revolve around absolute number of engagements, or number of stewardship staff and how they may have increased year on year. And yet, translating those figures into an engagements-per-analyst or an analyst-per-portfolio company ratio might provide a much-needed reality check.
Quality is critical but inherently limited by quantity, and investors need to take a hard look at the amount of resource they dedicate to stewardship and ask themselves whether this matches their ambition.
This isn’t just about self-reflection, but something that should lead to informed conversations between asset owners and investment managers, whereby resource expectations and practices are explicitly discussed, increased and aligned.
Our industry has a problem. We seem to be committing less than 1% of our front office resources to stewardship - an activity that is literally priceless in contributing value add and sustainable impact. We need to solve this paradox by rightsizing our resources to our ambitions.
Roger Urwin, Global Head of Investment Content, WTW, and Co-founder of the Thinking Ahead Institute.
The road ahead
The bottom line is that responsible investors need to improve their focus on stewardship activities that address systemic sustainability issues and resource them adequately while delivering long-term value to beneficiaries.
To help signatories do so, we have appointed the Thinking Ahead Institute to explore the future of outcomes-focused stewardship by looking at resourcing issues through a quantitative lens.
As we develop this work, we encourage investors to:
- apply to join our Stewardship Resourcing Technical Working Group;
- look at their resourcing practices and how they report on them;
- set expectations internally and with clients or managers for increased resourcing.
The PRI blog aims to contribute to the debate around topical responsible investment issues. It is written by PRI staff members and occasionally guest contributors. Blog authors write in their individual capacity – posts do not necessarily represent a PRI view.