What stewardship means for directors
Public interest in issues such as climate change, biodiversity and modern slavery is flowing through into investor sentiment, with a rise in active investment. This is reflected in a growing adoption of ideas of stewardship around the globe.
The United Kingdom set up the first version of its Stewardship Code in 2010 to restore trust in banks and finance institutions following the global financial crisis. This had a focus on securing the long-term sustainability of companies.
The UK code now has over 270 signatories and many other countries have developed their own codes. Investors have increasingly recognised the value of stewardship as a leading tool to address systemic risks to their portfolios.
What is stewardship?
Stewardship is the responsible allocation and management of capital by investors – including asset owners and fund managers – to create and preserve long-term value for current and future generations.
The goal is to promote sound investor and issuer governance and business practices that lead to sustainable outcomes for our environment, society and economy, as well as improved long-term risk-adjusted returns.
Why a Stewardship Code?
Improving public and private sector governance for sustainability was a recommendation in the Sustainable Finance Forum Roadmap for Action, released by the Aotearoa Circle in 2020.
The Aotearoa New Zealand Stewardship Code was launched in 2022 and is supported by the Responsible Investment Association Australasia and the Centre for Sustainable Finance: Toitū Tahua. One year on, the code already has 19 asset managers and owners as signatories, collectively managing the majority of New Zealand’s assets under management.
New Zealand’s investment community developed a code to meet New Zealand’s specific needs, drawing on existing regulatory requirements, key international codes (including the UK Code) and our local market and cultural context. Signatories are encouraged to consider te ao Māori and other cultural aspects when applying the principles of the code.
Active, rather than activist, investment
Recent research by Chapter Zero NZ and the Institute of Directors found 83% of respondents discussed climate in relation to organisational strategy and that governance-level thinking is beginning to translate into action, with 50% of respondents having measured their emissions, and 48% having set emissions reduction targets.
This is just one example of the director community already being well aware of the importance of environmental, social and governance (ESG) issues and the steps needed to address them.
In signing the Aotearoa New Zealand Stewardship Code, investors are actively committing to help companies navigate crucial ESG issues to maximise long-term value. Investor perspectives can add a great deal of value by helping companies to understand risks they may not have identified and to strengthen investor relations.
For example, NZ Super Fund led an engagement with social media companies following the Christchurch terror attacks to encourage them to improve their content control mechanisms. This engagement was joined by a number of other investors from around the world. Milford Asset Management has also engaged with Fisher and Paykel Healthcare to understand how they were addressing modern slavery risks within their supply chain. Its recent Engagement Activity and Outcomes report has more information about this.
The New Zealand code also encourages engagements relating to relevant policy issues. With investors increasingly disappointed by the speed of transition by fossil fuel companies around the world, engaging at a more macro policy level is becoming an effective way to influence some of these systemic challenges.
What does this mean for directors?
With a growing understanding of stewardship and the adoption of the code in New Zealand, we’re expecting investors to increase their involvement with the businesses they own, from voting at annual general meetings to holding more targeted engagements to better understand potential risks and the businesses’ responses to them.
To prepare for this, directors should ensure management understand the intent of these conversations: to build relationships and support the company to navigate critical ESG risks and opportunities. An open and transparent approach will strengthen the partnership with the investor.
Meeting preparation should include management being clear on the purpose of the meeting and ensuring staff involved understand the details of the issue. It may be appropriate to have a director join these meetings, particularly if the topic is directly under the board’s responsibility (ie executive compensation). Directors will likely value hearing directly from investors also.
Mei Zi Ho, research analyst from Nikko Asset Management said: “It’s about getting our investments right for all stakeholders, be it from a risk perspective, a pure ESG angle or due to our fiduciary responsibility to our investors. We are continuously seeking to understand our investee companies’ positions and sustainability goals by engaging in active conversation with them to improve ESG outcomes.”
With a majority of New Zealand’s assets under management now managed by Signatories to the Code, stewardship is rapidly gaining momentum within Aotearoa. Directors and investors already share a goal of long-term value creation. The Stewardship Code will support those conversations and help us make progress towards a more sustainable investment environment.
What to expect from Stewardship Code signatories
- Clear expectations to improve ESG outcomes for the company.
- Greater investment engagement with the company, including escalating concerns to directors if necessary.
- Active voting.
- A willingness to collaborate and advocate.
- Investor transparency on their engagement and on outcomes.
About the author
Jackson Rowland leads the Aotearoa New Zealand Stewardship Code. He also currently serves as a Board Trustee for Make a Wish New Zealand and was previously a regional lead for the World Economic Forum’s Global Shapers Community, and a member of the 2019 class of the Obama Foundation Leaders programme in Asia-Pacific.
