Pages: 26

This chapter introduces the relatively new concept of investor stewardship. It focuses on the role that investors should play in financial markets as responsible owners of equities, debt and other asset classes. We examine the origins of modern-day stewardship and the economic and political impetus that has led to the development of stewardship codes in many jurisdictions globally. Fiduciary duty of investors to their beneficiaries is a foundation of stewardship, and this chapter explores the scope of fiduciary duty, including the link to sustainability and the consideration of environmental, social and governance (ESG) factors in the investment process. We identify an investor's own governance as a critical factor in developing a robust stewardship capability. The chapter presents the ICGN Global Stewardship Principles as a global framework for good stewardship practice, and we explore how stewardship involves various links in the ‘investment chain’ and broader stewardship ecosystem. Finally, we look at the potentially competing interests of companies (boards and management), investors and other stakeholders, and how these interests ultimately require alignment over time to provide for sustainable value creation and healthy markets and economies.

Pages: 26

This chapter starts with definitions of corporate governance and considers why this is a topic worth studying. It explores the differing approaches to governance in diverse markets globally, considering the relevance of shareholder- and stakeholder-based models of governance, as well as the critical role that ownership structure plays in shaping governance practices in both developed and emerging markets. We focus primarily on governance at the individual company level, in particular on ICGN's Global Governance Principles (GGP) as a global benchmark of good governance practice from an investor perspective. But the chapter also reviews country-specific factors (including law, regulation and ownership structure) that influence governance standards and practice in individual jurisdictions. A critical survey of the academic literature on corporate governance in Chapter 3 will offer guidance on the relative importance of these factors as uncovered by empirical evidence.

Pages: 12

Companies, investors and other practitioners live in a world in which practical decisions are taken daily with regard to corporate governance and sustainability. For investors, these include basic investment decisions and company valuations, decisions on how to exercise voting rights and decisions on which companies to engage on which issues. All of this begs the question of what good corporate governance and sustainability mean in practical terms—and whether our prevailing beliefs, assumptions and codes of practice have valid underpinnings. It is useful for practitioners therefore to step back periodically from the daily grind to think about governance and sustainability in a broader and more rigorous context. This is where case studies and academic research can play an important role in helping practitioners to better understand how corporate governance and sustainability fit into a broader market context, and which commonly accepted practices are—or are not—substantiated by evidence linking corporate governance or stewardship to specific performance outcomes. This chapter also examines why both companies and investors should take sustainability seriously and will review the current, and continuously evolving, evidence trail relating both to corporate governance and sustainability research more generally.

Pages: 24

This chapter provides a general overview of the main sources of ESG data, standards and ratings currently available to investors. It is also intended to help investors sift through the multiplicity of sources to identify those most likely to contribute meaningfully to the quality of the stewardship activities they carry out. Most of this chapter focuses on ‘structured’ ESG data—information organised in a reasonably consistent and searchable format on behalf of companies, either voluntarily or in compliance with legal or regulatory requirements. This chapter also provides a summary of the state of play around sustainability reporting standards in the aftermath of the important developments of 2021. Description of the various strategies currently being experimented with is beyond the scope of this book. And it is not our intention here to make judgements about which approaches are likely to prove most fruitful for particular purposes. But investors who are serious about integrating considerations of ESG factors in decision-making clearly should follow developments in the application of big data and AI technologies to ESG data with an eye towards how they can contribute to their investment processes as more evidence about their potential utility emerges.

Pages: 28

This chapter examines important considerations institutional investors need to take into account in incorporating ESG analysis into the investment decision-making process. It discusses the practical challenges of integrating ESG analysis in a way that is consistent with, and contributes to, the achievement of an asset manager's investment objectives. While the operational procedures that institutional investors follow to make investment decisions certainly share some core commonalities, every investor's process will differ in important ways from those of its peers. Factors including asset class, return objectives, risk appetite, investment style, time horizon, the expertise and experience of staff, resource constraints and the firm's investment beliefs account for these differences. Accordingly, there are no one-size-fits-all solutions. Each institutional investor needs to understand the available resources and possible approaches to considering ESG factors in investment decision-making and adopt inputs, analytical tools and outputs that fit with its unique investment process.

Pages: 32

This chapter addresses the practical issues related to the stewardship building blocks of monitoring, engaging, voting (for equity investors) and reporting. In addition to listed equities, we also consider other asset classes—in particular, creditors. An institutional investor's post-investment stewardship activities should not be divorced from its methodology for incorporating ESG factors into its pre-investment due diligence and decision-making process. Rather, an investor's policies and practices around monitoring the ESG performance of companies, engaging with company management on sustainability issues, and share voting should be natural extensions of its comprehensive ESG methodology.

Pages: 24

Thus far, our book has focused on investor stewardship and on both why—and how—to integrate ESG factors into the investment process. But we believe, in this chapter, it is important to address the company perspective in terms of both the governance of sustainability and how material sustainability issues are best reported and assured. However, the investor angle remains, as we present investor expectations and aspirations for how sustainable companies might best approach sustainability governance and integrated reporting. This includes consideration of the role of audit and assurance in both financial and non-financial performance reporting.

Pages: 20

As a capstone exercise, this chapter is a case study of Volkswagen AG (VW) that seeks to apply the concepts of this book in an actual company setting, linked to the now-infamous ‘DieselGate’ scandal that became public in 2015. Why VW? It is a well-established company and brand in a sector that is also highly visible. The huge impact of the scandal continues to this day and has been widely reported in the popular media. As we will see, the DieselGate case is very much an ESG story, building from the competitive challenges of the auto sector, VW's stakeholder relations and its distinctive corporate governance structure. The case study focuses on the years 2014 and 2015—before the scandal became public and in its immediate aftermath. Rather than jump immediately into ESG issues, the approach of this case study is to begin with traditional elements of business and financial analysis: looking at the economic and commercial pressures in the auto sector and linking this to VW's competitive profile, strategy and financial outcomes. We also explore VW's own approach to sustainability and how this linked with the specific ESG issues facing the company. There are no ‘right’ or ‘wrong’ answers. But the purpose of the case is to provoke thought in terms of how ESG issues affected VW and its performance—and how investors might approach VW in terms of stewardship.