Environmental, social and governance (ESG) investing has made great headway in the past two years. It’s a trend that’s continuing to accelerate. In fact, our new research study, The future of asset management, highlights that 79% of asset managers believe that economy/purpose investing (ESG) as an investment strategy will define the next five years.
The rise of ESG is fueled by investors’ desire to do the right thing for communities and the planet. But there’s also a strong financial incentive: ESG-focused funds outperformed traditional funds during COVID-19, and indeed have done so over the past 10 years.
Expanding beyond ESG to investment stewardship
However, while ESG is increasingly important, it’s just one part of a bigger picture – which is about ‘investment stewardship’. This concept encompasses the ongoing governance of all companies, funds, and portfolios that asset managers oversee, and not just their ESG products and investments. The aim? To ensure that the values of fund shareholders are being accurately represented through fiduciary duty.
Today, most asset managers seek to fulfill their governance responsibilities on an ongoing basis— usually through industry analysis and research, and by holding meetings with investee companies’ senior management. In a similar way to how firms are embracing ESG standards today, more robust stewardship approaches that go beyond ESG to include areas like data protection and innovation, could also be deployed to enable more meaningful governance of investee companies.
We believe it’s only a matter of time before investors demand that asset managers apply this broader lens of governance to all their investments.
In a recent Accenture Research survey on investment stewardship,
92% of asset managers agreed their firm is looking to transform
their investment stewardship approach within the next five years.
A new era of stewardship
Given the scale of today’s leading asset managers, this shift could have huge ramifications. The three biggest asset management firms in the US are the largest shareholders in 88% of S&P 500 companies. Their proxy holdings carry voting rights and give them an opportunity to influence corporate governance proactively and ensure it aligns with their investment stewardship principles.
Proactive, transparent investment stewardship could be a competitive differentiator and offers several other benefits for asset managers:
- Strengthening their brand and attracting more investors by weaving their stewardship approach and vision into brand storylines.
- Deliver greater shareholder value: it’s been shown that companies with higher governance scores significantly outperform their peers.
- Greater investor value by transforming stewardship into a more personalized experience and assisting investors in choosing funds that align with their personal values.
80% of asset managers agree that their firm considers investment
stewardship as an opportunity to generate value and
performance for shareholders.
How to scale stewardship
We believe that investment stewardship will become as core to the industry as client interaction and investment management in the years to come. But to achieve its full potential, stewardship should be scalable.
There is a major opportunity for asset management firms to transform their operating models to scale up investment stewardship across their holdings and maximize its effectiveness. By applying analytics and AI to a mass of market data, portfolio data and non-traditional ‘alternative’ data, firms can gain new and deeper insights into each company and its industry, enabling greater stewardship.
84% of executives agree that deploying AI and analytics would
add value to their governance and stewardship activities over
corporations held by the funds.
To bring this renewed vision of stewardship to life, a further component is vital: Firms will need the right talent – client-centric groups of the same caliber as their investment teams.
The rise of investment stewardship has begun
Asset managers should get ahead of this change by proactively embracing the opportunity of introducing new ways of investment stewardship and then scaling it up. The results? More meaningful conversations with company boards and CEOs. And more effective governance.
Learn more about investment stewardship and creating the future of asset management. If you’d like to talk about your own journey, please reach out. I’d love to hear from you.