Investment stewardship organization

Organizationally at sustainable investing there are major concerns how to scale investment stewardship efficiently beyond a handful of investee companies. How do those stewardship efforts ought to be managed, monitored and controlled? What are the most efficient governance structures to oversee diversified cross-sector international stewardship efforts?

There are a few options allowing different degrees of flexibility, efficiency and control.

✶ Centralized Stewardship funnels all decision making to one stewardship team controlling related policy development and targets, monitoring and actually engaging with investee including voting. The benefits are tight control, risk management and more transparent oversight.

✶ Decentralized Stewardship relies on individual investment teams to pursue financial performance and impact goals. While difficult to manage and challenging to control, this structure provides flexibility at international context, better understanding of local values and situation on the ground, or catering objectives for a specific group of clients.

Decentralization may be built on geography, products (i.e., publicly listed companies vs private investments) or thematic goals and objectives (climate change, social equality, environment, etc.)

Proven effective is two-tier Coordinated Engagement when lead investors are based locally and coordinated by specialized expertise internationally.

✶ Delegated Stewardship originated with delegation of voting and then analysis of voting decisions. While further offloading may come with a kind of cost efficiency, the approach may put excessive responsibility into the service provider’s hands.

Challenging engagements demand concise strategy, high-level diplomacy, juggling the multitude of communication channels, and background to draw upon the best management and strategy practices in particular industries.

Investors might want to consider what constitutes a core part of the portfolio. Delegation of stewardship for this part equals externalizing key strategy decisions and deprives asset owner or asset manager of its core value.

✶ Hybrid Stewardship combines various approaches to improve efficiency throughout wide service proposition and international diversity. The model demands strong governance structures to cement investment, stewardship, compliance, legal and operations activities together. Central committees focus on outliers based on the principle-based framework.

Furthermore, highly concentrated holdings of passive index funds, Big Three holds more than 25% of S&P 500 companies implying significant potential influence, often take issue-based top-down approach based on external research and must balance tightrope of public relations policy with incentives of operational efficiency to underinvest into stewardship and defer excessively to the preferences and positions of corporate managers.

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Dr. Tymur Khusainov
Sustainable Finance and ESG Consultant