IN SAFE HANDS

Stewardship: Is it time for a new ESG lens?

Could an attitude of good stewardship enhance frameworks for good governance to flourish?

Stewardship is not a new concept in financial services, though historically it has tended to be applied within the context of asset management.

Investors typically use the term to describe their ability to leverage a positive influence over companies either by means of proxy voting or through active engagement with a company’s senior management and industry-wide groups.

A more fundamental application of the concept of stewardship may assist firms in developing their approach to ESG principles and standards. To us, the notion of true stewardship is an appropriate foundation on which regulated firms should build their vision and form coherent governance strategies to manage effectively the obligations that arise not only out of ESG, but also from regulators’ sharp focus on non-financial misconduct, inclusion and diversity, and consumer protection.

Stewards of money

Every member of the financial services industry is, in some capacity, a steward of funds in respect of which another person holds a legal and/or beneficial interest. As participants in our economy, we are mutually inter-dependent on one another – each stakeholders in the health of the wider economy. A substantial part of a regulator’s role is to remind regulated firms and individuals of this by imposing duties to act in a particular way (with integrity, conducting their businesses with due skill, care and diligence, treating customers fairly, and in compliance with the vast array of applicable regulatory rules).

Obvious as this may be, it is nonetheless true that firms that are able to embed such an understanding among their employees will find themselves, more often than not, on the right side of the regulator. It is for this reason that the FCA in the UK, for example, is interested in firms and employees understanding their wider purpose.

From a regulator and public perception standpoint, good stewards understand their purpose, naturally act with appropriate skill, care and diligence.

They act in the knowledge that the funds they invest are not their own. They act with integrity because they bear in mind that more than profit is at stake.

These are simple concepts. Compliance frameworks that consider and incorporate them in the context of the business are more likely to succeed than those that do not.

Increasingly regulators are outlining criteria for and even differentiating good stewardship. Take for example, the UK FRC’s recent public statement encouraging embrace of the UK Stewardship Code. In the US, the Federal Reserve’s 2022 Annual Performance Plan includes as part of it’s Mission Enablement Goal 5 “sustainable stewardship.” While that is an internal facing FRB objective, it tends to signal that focus is likely to extend outward to regulated market players as well.

Stewards of people

Like any large corporate, financial services firms (and senior management in particular) are stewards of their people. As well as being members of markets, firms are both members of communities and communities of members. Their duties to ensure the welfare of their employees (none of whom will stay forever) have been brought into sharp focus by the pandemic. As we emerge from homeworking, many employees are more intent on achieving “work-life balance” and have both a greater level of influence over when and how they work, and a greater number of options of where to do so. This trio of factors means employees are voting with their feet.

Firms who want to attract and retain talent must facilitate enabling environments, built on equality of opportunity, in which individuals from every corner of society can flourish. Senior managers who acknowledge the privilege of their unique role in stewarding the careers of those who choose to entrust their professional development to their firm are no doubt more likely to foster loyalty and a culture in which employees want to give their very best. Those who recognise that, with greater influence comes greater opportunities to serve the needs of others (arguably the most effective approach to human capital management), and who build their cultures accordingly, will have less reason to expect regulatory attention.

Stewards of the environment

While it may seem a tall order for members of the financial services industry to be considered “stewards of the environment”, the result of COP26 is that firms are increasingly regarded as such. Last year’s global conference highlighted the vital and unique opportunity that private finance has to play in safeguarding our ecosystems for future generations. It called on firms to acknowledge the planet as the silent stakeholder to both their every-day business decisions and their long-term governance plans.

Firms have the opportunity to unite their employees around a common vision of positive climate impact and to embed a culture of genuine care for their footprint, on both a micro and macro scale. A culture that embraces the responsibility placed on the finance industry in the wake of COP26 will make for a strong foundation on which to build the systems and controls necessary to flourish amidst the growing number of environmental regulatory requirements.

Stewards of culture

Without a holistic understanding of stewardship, it is easy to get lost in the growing lists of obligations imposed by regulator and stakeholder demands, and firms may struggle to implement a successful, integrated approach to culture-setting and governance. We have consulted with and advised many clients in relation to their culture and have seen first-hand the regulators’ interest in it. Our experience tells us that culture significantly impacts on both corporate and individual conduct (whether financial or non-financial, whether detected or undetected), and conduct, in turn, is the most concrete evidence available of a firm’s culture.

CONCLUSION

Healthy culture-setting is more than policies, hotlines and transition plans. It requires shared vision and determined intention.

Firms that take on the mantle of good stewardship not only set themselves up to effectively manage both regulator and stakeholder expectations, but may also gain other more concrete market and business performance objectives.

Good stewards consider and look after the client, the colleague, the climate, and the consumer, and in so doing, the company. While the appropriate response to the growing number of environmental, social and governance challenges will be unique to firms’ specific strategic priorities and business goals, adding these considerations to the mix should shed fresh light on those challenges, bringing them into sharper focus.

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MEET THE AUTHORS

LUKE HARDINGHAM

Associate, London

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DOUGLAS THOMPSON

Partner, Los Angeles

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This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.

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