Asset owners occupy a pivotal position in the investment chain and set the tone at the top for stewardship through capital allocation decisions, agreed expectations with external managers and their own activities. Building on IIGCC’s NZIF Guidance for Externally Managed Funds, the new Asset Owner Climate Stewardship Guidance and the Asset Owner Stewardship Forum explored how asset owners can undertake strong climate stewardship in practice.
Asset owners play a central role in embedding strong climate stewardship into the investment chain, both through their own stewardship activities and, where investments are externally managed, by setting clear expectations for fund managers and maintaining ongoing oversight.
IIGCC published the NZIF Guidance for External Management Funds (EMFs) to help allocators assess and improve how EMFs contribute to their net zero goals. The Asset Owner Climate Stewardship Guidance sits alongside this, providing recommendations on how to use stewardship to address climate-related risks and opportunities and accelerate real-economy decarbonisation.
To explore how the Asset Owner Climate Stewardship Guidance can be applied in practice, IIGCC hosted an Asset Owner Stewardship Forum bringing together asset owners, asset managers and stewardship specialists. Participants discussed key takeaways, shared experiences of the opportunities and challenges asset owners face and explored examples of good stewardship practice.
One message stood out: Asset owner stewardship is most effective when expectations are articulated upfront, communicated clearly and consistently reinforced.
Setting expectations early: the value of articulating stewardship ambitions
Asset owners should first define their stewardship strategy and level of ambition, setting out how stewardship will be used to support improved investment outcomes and stated climate commitments. This clear articulation helps determine resourcing and, for those investing externally, delegation arrangements and manager expectations.
This strategy should then be embedded into internal governance structures and reflected in manager selection. Mandates and investment management agreements (IMAs) are critical leverage points to ensure stewardship expectations are formally embedded, providing a clear grounding for future manager engagement and oversight.
People's Pension, Chair of IIGCC’s Asset Owner Stewardship Working Group, explained how they use mandate design to clarify stewardship expectations from the outset, including sought-after outcomes and a detailed stewardship workplan to heighten performance over time.
In their experience, clear communication upfront is far more effective than attempting to change behaviour later. By translating responsible investment ambitions into an accountable delivery framework, managers have a clearer basis on which to demonstrate progress.
Strengthening fund alignment through engagement
Fund alignment can be assessed across factors such as ambition, governance, targets, transition plans, disclosure and performance. However, alignment is not static. Ongoing engagement with managers can strengthen alignment over time, reinforce stewardship expectations and enable progress to be tracked against the agreed strategy.
Where stewardship activities are delegated, manager selection is critical. Forum participants reinforced the need to assess prospective managers' stewardship capabilities, resources and track record, and to maintain regular engagement after appointment to ensure stewardship activities support the asset owner’s climate goals and wider long-term investment objectives.
Overcoming resource constraints: lessons for smaller asset owners
Smaller asset owners often face further challenges due to more limited resources. Strong prioritisation of activities, collaboration with other asset owners and external partnerships can help to overcome some of these barriers.
Ethos, the Swiss Foundation for Sustainable Development, provided examples of how small asset owners can mitigate cost pressures and resource constraints. Its activities include direct engagement on behalf of pension funds and manager voting analysis. Their work helps smaller asset owners to increase their influence, over managers and in the wider investment ecosystem. Leveraging specialist external expertise, collaborative engagement initiatives and sharing best practice can help asset owners to maximise stewardship capabilities and influence.
There is no single model for asset owner stewardship
PFA provided participants with examples of their experience as an asset owner investing primarily in-house. PFA’s approach combines direct company engagement with collaborative company and policy engagements - through investor networks such as IIGCC.
Asset owners can bring a long-term perspective to company dialogues, particularly collaborative engagements. Collaborative initiatives, in turn, provide asset owners with additional expertise, capacity and scale.
Different beneficiary needs and investment approaches require different stewardship approaches. Regardless of the model, it is critical that all stewardship activities, undertaken by asset owners themselves or delegated to managers, support long-term investment outcomes and work towards stated climate objectives.
The Asset Owner Stewardship Forum reinforced that effective asset owner stewardship is not defined by a single model. While approaches differ, successful climate stewardship will be characterised by clear articulation of ambitions and expectations, strong alignment among partners, and a strong understanding of where the asset owner is best placed and able to act.
For more information on IIGCC’s work around climate stewardship, or to discuss application of the Asset Owner Climate Stewardship Guidance, please contact Patrick McNamara, Net Zero Stewardship Specialist.