Investment managers shouldn’t neglect responsible investment and tackling systemic risk such as climate change according to LCP, as they issue new best practice principles on how managers can use their considerable leverage to combat these risks. The principles will help asset owners discuss systemic stewardship with managers and encourage improvements where manager approaches fall short of their expectations.
Systemic stewardship describes actions that are taken by investors to influence the outcomes for the whole financial system, such as engagement with policymakers and regulators rather than purely through engagement with companies, with the objective of addressing systemic risks that have the potential to materially harm financial outcomes.
Investment managers are a key part of the investment chain as they have a large asset base behind them to use as leverage in their stewardship activities. Most managers are already applying issuer-level engagement to tackle systemic risks, and using systemic stewardship will support this. Indeed, issuer-level engagement on systemic risks will often fail to be effective without system level changes.
LCP’s best practice recommendations for investment managers include:
- Having clear public policy positions and a strategic approach that focuses on the most relevant or material risks
- Checking consistency of positions with trade associations and industry groups that the manager belongs to
- Using collaboration where individual engagement will be insufficient to address the risks
- Using progress monitoring to review the effectiveness and prompt potential escalation
- Appropriately resourcing systemic stewardship work
- Disclosing activity for transparency
According to LCP’s latest survey of investment managers, although many managers are engaging with policymakers and regulators to some extent, there is often room for improvement.
Sapna Patel, Principal in LCP’s Responsible Investment team, commented: “Recent changes in the international political backdrop and polarisation in views has made responsible investment a trickier subject for some investment managers to navigate. However, systemic risks cannot be solved without considering the high-level structures and functions of our economies, predominantly built upon legislation and regulation. Systemic stewardship is often overlooked but it’s important that asset owners investigate how seriously investment managers are taking this.
“Our principles can be used by investment managers to understand our views on their approach to systemic stewardship, and to consider how it might be enhanced. Importantly, the principles can also be used by asset owners to hold their managers to account and to check whether they are leveraging this important route to addressing some of the biggest risks to good financial outcomes for the future.”
