Sustainable Finance and Stewardship: Unlocking Stewardship's Sustainability Potential

Abstract

This paper explores the role of investor stewardship against a background of broader efforts to improve the sustainability of financial markets. Stewardship codes, encouraging institutional investors to act as long-term, responsible shareholders, comprise an emerging aspect of contemporary corporate governance frameworks with important implications for sustainable finance. They have the potential to promote the incorporation of environmental, social and governance (ESG) factors into both financial and business decision-making. This paper examines the way in which 25 stewardship codes from across the world approach ESG integration and explores the possibilities for enhancing their impact on sustainability. It concludes that stewardship codes form an influential part of the overall network of regulatory instruments supporting sustainable finance. They help to secure transparency, accountability and a progressive interpretation of long-standing fiduciary duties that better balances the interests of all stakeholders.

Stewardship Codes and the Role of Institutional Investors in Corporate Governance: An International Comparison and Typology

“…This has important implications for management in terms of defining the purpose of the corporation and finding an acceptable balance between the pursuit of shareholder value and the interests of wider stakeholders. Increasing global interest in improving the sustainability of financial systems is only likely to push stewardship codes further towards stakeholder theory concepts and integration of ESG (Katelouzou and Klettner, 2020). Indeed, the 2020 versions of both the UK and Japanese codes have increased emphasis on ESG, possibly altering their position in the typology of codes above.…”

“…The idea that corporations should be more socially responsible, by balancing the interests of all of their stakeholders (including employees, suppliers, customers and the environment) rather than focusing on the wealth of shareholders, has been embraced both theoretically (Freeman et al, 2004) and, to some extent, in corporate law (Keay, 2010;Keay, 2011 (Katelouzou and Klettner, 2020;Majoch et al, 2017;Sparkes and Cowton, 2004) thereby supporting companies' CSR efforts.…”

“…Stakeholder theory, applied primarily to corporate decision-making, now has a parallel at the investor level. As companies increasingly take account of environmental and social issues to demonstrate corporate social responsibility (CSR) or corporate sustainability, institutional investors increasingly take account of ESG factors to demonstrate responsible or sustainable investing (Katelouzou and Klettner, 2020;Majoch et al, 2017;Sparkes and Cowton, 2004), thereby supporting companies' CSR efforts. Paradoxically, stakeholder theory, applied at the investor level, suggests that it is in the interests of shareholders not to prioritize their own immediate financial interests, but to look to the long term and take an 'enlightened' view of shareholder value when making investment decisions, particularly when they are investing on behalf of others (Keay, 2011;Sandberg, 2011Sandberg, , 2013.…”

From a Financial to an Entity Model of ESG

“…See alsoChiu and Katelouzou (2018), p 85, commenting on the evolution of the UK Stewardship Code from its previous incarnation: 'The Code [the superseded Institutional Shareholders' Code] has been rebranded into a "Stewardship" code, framing shareholder engagement into an exercise of responsible ownership which connects the private interests of institutions to their perceived socially important role.' 99 SeeKatelouzou and Klettner (2020). The strongest stance is in South Africa (Code for Responsible Investing 2011 in SA) building on the PRI, followed by Australia.…”

“…The survey also found frequent references to fiduciary duty in stewardship codes, prompting reference to the capacity of stewardship codes to 'interpret and extend' hard law, albeit that '[…] from the nineteen codes that explicitly link stewardship practices to the fulfilment of investors' legal duties, only four codes(i.e. Brazil 2016, ICGN 2016, Kenya 2017 and Thailand 2017 clearly regard the consideration of ESG factors as part of institutional investors' fiduciary responsibility'(Katelouzou and Klettner (2020), p 25).100 In contrast, the 2010 version of the Code had recognised that activism is a strategy that should be considered by institutional investors in order to discharge their fiduciary obligations to end-beneficiaries. See MacNeil (2010a), p 425.101 See MacNeil (2010b), pp 421-423, for a concise summary of UK shareholder rights in this context.…”