What is Systemic Stewardship?

Systemic stewardship builds upon traditional notions of stewardship by emphasising the responsibility of investors to safeguard and enhance not only the financial value of their assets, but also the underlying social and environmental systems that support wealth creation. This approach involves promoting sustainable practices that contribute to long-term financial performance while also addressing system-level issues.  

This broader approach recognises the need for systemic solutions to systemic challenges and emphasises the role of investors in influencing policy to address issues like climate change. Typical stewardship activities, including company engagement and proxy voting, can be complemented by systemic stewardship, which extends to public policy advocacy. 

Universal owners, which are large institutional investors holding diversified portfolios that represent a significant portion of the entire market or economy, are positioned to have significant influence on a wide range of companies. These investors are considered ”universal owners” because their investments span multiple sectors, industries, and geographic regions. Advocates argue that these investors should adopt a systemic stewardship approach, using their leverage to promote market-wide initiatives that reduce environmental externalities and systemic risks. For instance, they might pressure companies like ExxonMobil and Chevron to reduce carbon emissions.

What tools can be employed for Systemic Stewardship?

As stated, systemic challenges need systemic solutions, but what tools are currently available to asset owners? Here are a few ways investors can prioritise systemic stewardship:

1. Sector/Value Chain Engagement:
   • By engaging with entire sectors or value chains, investors can support solutions across industries. This approach is efficient for addressing systemic challenges and helps identify economic, technological, and regulatory barriers to decarbonisation processes. It lays the groundwork for policy engagement.

2. Policy Engagement:
   • Investors can use their voice to advocate for policy changes that accelerate decarbonisation efforts. This indirect lever allows investors to join other stakeholders in calling for action from policymakers to address technological and regulatory hurdles. Policy engagement is crucial for overcoming systemic limitations to corporate engagement.

3. Asset Manager Engagement with Asset Owners:
   • Asset managers play a pivotal role in stewardship activities, and it’s important for them to align their actions and messaging with the long-term interests of asset owners. 

4. Collaborative Engagements:
   • Large asset owners are realising the limitations of engaging with individual companies on specific issues. Instead, they are shifting their focus to influencing change across systems through collaboration. This involves working together on engagement efforts, actively considering regulatory issues, and engaging with governments to drive systemic change.

5. ICGN’s Systemic Stewardship & Public Policy Advocacy Toolkit:
   • The International Corporate Governance Network (ICGN) has launched a toolkit that allows investors to expand their stewardship programs beyond traditional engagement and proxy voting. This toolkit encourages investors to contribute positively to the public policy debate, including legislation, regulation, and standards-setting, alongside ICGN’s advocacy efforts.

Source: https://www.tiiproject.com/wp-content/uploads/2022/01/TIIP-Stewardship-Final.pdf, page 19.

What are the Benefits of promoting Systemic stewardship?

It might seem obvious why Systemic Stewardship is a positive method for Investors. Here are a few reasons why the promotion of this approach is essential:

1. Broadening Impact Beyond Corporate Engagement:
   • While traditional corporate engagement has been successful in raising climate ambitions and securing company commitments, systemic stewardship expands the focus beyond individual companies to address broader issues such as climate change, biodiversity loss, and income inequality.

2. Fulfilling Fiduciary Duty:
   • Investors have a moral obligation and fiduciary duty to mitigate systemic sustainability risks using stewardship powers, even if this may not directly benefit a particular company’s value. By considering both financial and environmental objectives, such as net-zero commitments, investors fulfill their fiduciary duty to address systemic issues.

3. Adopting Stakeholder-Focused Models:
   • The traditional focus on clients and financial objectives is evolving towards a stakeholder-focused model with multiple objectives, including financial and environmental considerations. This shift reflects a broader understanding of investor responsibilities and the interconnectedness of environmental, social, and governance (ESG) factors.

4. Addressing Systemic Challenges:
   • Systemic stewardship allows investors to tackle complex issues such as climate change, biodiversity loss, income inequality, and gender inequality. By setting system-level goals and committing to addressing these challenges, investors contribute to the resilience and sustainability of systems, leading to positive outcomes like safer working conditions and reduced social unrest.

What challenges could be faced by Universal Owners?

Universal owners, who hold significant stakes in a wide range of companies, may face several challenges in their stewardship efforts:

1. Anticipating Tangible Results:
   • Achieving meaningful outcomes through stewardship efforts often requires patience, as changes may take time to materialise. This prolonged waiting period can be challenging for universal owners seeking to see tangible results from their engagements.

2. Cost Considerations:
   • Universal owners, particularly those with index funds, prioritise minimising costs. This can make it difficult to justify significant expenditures on stewardship activities, which may require dedicated resources for engagement and advocacy efforts.

3. Technological and Economic Constraints:
   • In some cases, the decarbonisation needed to address systemic issues may face technological or economic barriers. Without sufficient incentives or stable policy frameworks, decarbonisation efforts may not scale through corporate engagement alone. This may pose a challenge for universal owners aiming to drive meaningful change.

4. Measurement and Reporting Challenges:
   • Universal owners need to systematically measure and report the progress and outcomes of their engagement efforts. This requires robust systems and processes for capturing company-specific objectives and interactions. Enhancing qualitative reporting with case studies can provide visibility into the impact of engagement activities.

5. Visibility of Asset Managers’ Contributions:
   • Universal owners also require greater visibility into the contributions of asset managers to engagement outcomes. Engagement management systems can help track objectives and document the efforts made by asset managers in raising concerns and implementing potential solutions with companies.

6. Estimating Impact on Investment Performance:
   • Universal owners need to develop methods for estimating the investment and real-world impact of engagement outcomes. This involves measuring or estimating the impact of engagement efforts on investment performance, particularly in addressing risks and opportunities related to specific companies or investment portfolios.

Addressing these challenges requires a coordinated effort from universal owners, asset managers, and other stakeholders. Together, they can effectively integrate stewardship practices into investment strategies and drive positive outcomes for both investors and society.

Can  Systemic Stewardship really succeed?

The success of systemic stewardship faces several challenges that need to be carefully addressed:

• Competitive Responses and Portfolio Profitability:
  • Encouraging certain firms to reduce environmental externalities and mitigate risks may trigger competitive responses that diminish the benefits for other portfolio companies. For example, pressuring companies like ExxonMobil and Chevron to reduce output could impact portfolio profitability. Especially considering the substantial control of petroleum reserves by entities beyond the influence of universal owners.

• Complexity of Fiduciary Duties:
  • Universal owners manage diverse portfolios for various clients, each with its own fiduciary duties. Implementing strategies that benefit some portfolios at the expense of others could conflict with these fiduciary obligations and undermine the core multi-client multi-portfolio business model.

Addressing these challenges requires careful consideration of the trade-offs involved and the development of strategies that balance the interests of different stakeholders. All while also promoting systemic stewardship.

Conclusion

Despite the potential obstacles mentioned above, systemic stewardship holds the potential to drive positive change by encouraging sustainability across entire systems. However, its success depends on navigating the complexities of portfolio management and fiduciary responsibilities effectively.

Overall, these examples illustrate how investors are increasingly engaging in systemic stewardship and public policy advocacy. These tools are crucial to address pressing societal and environmental challenges while safeguarding their investments. 

With the right tools, measuring & reporting frameworks and collective effort, systemic stewardship has the potential to truly influence companies and consequently have a greater positive impact on global challenges.