Are your investment managers using all the tools they can to reduce risk to your portfolio?

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, it is important that they continue to tackle the largest risks to your investments, and ultimately your beneficiaries, and in my view they should be using all the leverage they are able to. An often-overlooked avenue is systemic stewardship. So, what is systemic stewardship, why do investment managers have a role to play, and how can you tell whether your managers are taking this seriously? 

What are systemic risks? 

It would have been hard to shield yourself from the effects of the Covid pandemic, both personally and from a financial perspective. This was the product of a systemic risk – meaning a risk that affects the whole market and can’t be addressed by diversifying a portfolio.  

We continue to face a range of systemic risks. Some of these are unfolding now - for example the increase in extreme weather events linked to climate change, including drought in the Amazon, wildfires in North and South America, heatwaves in Europe, hurricanes in the Atlantic, typhoons in Asia and floods in several locations globally. Others are more uncertain in terms of the likelihood or nature of the impacts. 

What is systemic stewardship? 

Micro-level actions such as engaging with companies can be extremely important to address aspects of these system level problems, for example engaging with water companies to address flood risks. However, systemic risks cannot be solved without considering the high-level structures and functions of our economies, predominantly built upon legislation and regulation. This means the routes to addressing these issues should be varied and not just focused on company level engagement. This is where systemic stewardship comes in - actions that are taken by investors to influence the outcomes for a whole system, with the objective of addressing systemic risks that have the potential to materially harm financial outcomes. 

The role of investment managers 

So, which of the various parties in the investment chain – eg asset owners, advisers or investment managers – should be carrying out systemic stewardship?  

We are all dependent on the integrity of financial markets and the wider economy as a whole – as individuals, companies, trustees, advisers, investment managers. Therefore, it is hard to argue that we shouldn’t all have responsibility to address these potentially catastrophic risks in whatever capacity we have. 

All links in the chain have power and can support each other to address systemic risks. The simple answer is that this is everyone’s role to some extent.  

There are some large asset owners that are carrying out systemic stewardship, either on their own or as part of a collaborative group, often at industry level. For smaller asset owners though, this is not realistic and they are looking to others to help them with this. As advisors, we have a role to play here (and for more information on some of the work we are doing, read about how we are using investor influence to combat climate change). However, investment managers are a key part of the chain. Firstly, they have a large asset base behind them to use as leverage in their stewardship activities generally. Secondly, in the majority of cases they are already applying issuer-level engagement to tackle systemic risks, and using systemic stewardship will support this – you could even go as far to argue that, in some cases, issuer-level engagement will fail to be effective without system level changes. 

To what extent are investment managers already carrying out systemic stewardship?  

In 2024, we surveyed managers on their systemic stewardship activities and found that, although managers are engaging with policymakers and regulators to some extent, there is often room for improvement (for more detail on our findings, read our report). Perhaps this is not surprising given system-level stewardship often requires a different mindset – engagement is needed at a different level, sometimes using a different skillset to issuer-level engagement, it can be harder to attribute the impacts and link this to immediate commercial benefit, and some managers are wary of being targeted by political actors that have other priorities.  As a result, although there are a few managers that are embracing system-level engagement as a core part of their investment approach, it is understandable that many managers find this a trickier area to navigate. 

Important considerations for systemic stewardship 

This prompted us to ask - what are the key attributes of a good approach to systemic stewardship? Having thought about this, we have put together a set of principles that we believe represent best practice for investment managers.  

Some of these relate to the foundational aspects, for example having: 

• clear public policy positions;
• a strategic approach that focuses on the most material or relevant risks; and 
• a robust governance framework.  

Others relate to the way in which systemic stewardship activities are conducted, for example: 

• checking that there is consistency with trade associations and industry groups that the manager belongs to; 
• using collaboration where individual action will be insufficient to address the risks; and
• using progress monitoring to review effectiveness and prompt potential escalation. 

It is also important that systemic stewardship work is:

• supported through appropriate resourcing; and
• made transparent through disclosure of activity. 

You can find the full set of principles here.

How can these principles for systemic stewardship be used? 

Clearly, these principles can be used by investment managers to understand our views on their approach to systemic stewardship, to consider how it might be enhanced and initially focusing on areas where they can have most impact. 

Some investment managers may feel pressure in the current environment to deprioritise or downplay systemic stewardship if some of their clients do not fully appreciate the financial impacts of these system-level risks and if they are concerned about political backlash. Importantly then, the principles can also be used by asset owners to discuss systemic stewardship with their investment managers in the context of their overall approach to responsible investment, and to check whether they are appropriately leveraging this important route to addressing some of the biggest risks to outcomes for their beneficiaries.