annual review indst 2024 public - Flipbook - Side 8
8
EOS
Foreword
Leon Kamhi
Head of Responsibility and EOS
EOS was formed two decades ago with the
aim of helping our clients improve the longterm fundamental performance of their
investment portfolios through engagement
with companies and policymakers, aligning
their decisions and the outcomes they
achieve with investors’ interests.
To engage effectively with a company and respect its
limitations, stewardship professionals will need to bring a
solid understanding of how the business works, as well as a
familiarity with the market in which it operates. Without this
knowledge, there is a danger of promoting box-ticking
solutions for board composition, executive remuneration, and
environmental and social considerations. The focus should
remain on the fundamental performance of the business and
not short-term market valuations.
Back then, stewardship focused on good corporate
governance and value-creating capital allocation, with
environmental and social concerns addressed by thematic,
so-called Socially Responsible Investment (SRI) funds.
Today, environmental and social issues have rightly become
mainstream, and can drive the success of the wider economy
as well as the performance and capital allocation decisions
of a company.
Two decades ago, poor corporate governance often
misdirected capital allocation as company boards went about
building business empires rather than achieving financial
returns. But a focus solely on disclosure and better corporate
governance has prompted some company boards to become
risk averse in their capital allocation. Purposeful, businessoriented corporate governance provides the crucial
foundation for company boards to take decisions – hence its
importance to stewardship.
Due to polarisation in many societies and the potential impact
of climate change and technology on jobs and household
budgets, sustainability – particularly ‘ESG’ – has become
politicised. The resulting turbulence underscores how
important it is for all in the investment chain to remain
focused on fiduciary duty and the long-term financial interest
of the investor.
Practically, this means driving real world change to help
companies perform across different business cycles,
regardless of the political backdrop of the day. Environmental
and social issues will likely be an integral part of this picture.
For example, the transition to a low carbon economy presents
risks and opportunities for multiple sectors.
For a universal owner widely invested in the economy, fulfilling
fiduciary duty is also about engagement with policymakers
and standard setters. The aim is to address systemic risks and
incentivise the private sector to further the societal and
environmental goals so crucial to the financial wellbeing of
the end investor. But to do so, policy engagement and
advocacy has to be driven by investor need and long-term
financial interest, not politics or culture wars.
Action versus disclosure
In 2025 and beyond, policy and company engagement
will necessarily evolve to be more action-oriented and
complementary. Arguably, stewardship and regulation
has over-focused on disclosure rather than purposeful
governance and real-world outcomes – now we need to
move towards action.
As the climate and technology disruptions relentlessly
manifest, companies will need to invest to be relevant for the
future, and the returns of those investments will be far from
certain. But those companies that do nothing will most likely
fail. As a result, investor stewardship will need to evolve,
working collaboratively with boards, and empowering them
to invest for responsible and profitable growth.
Maybe universal asset owners can help to drive a cultural
change in the industry, as they have the power to set
investment management mandates that acknowledge
systemic risks across portfolios. Effective stewardship should
be a key part of those mandates.
