Stewardship and Engagement: Complete Guide for CFA Sustainable Investing Candidates
- Kateryna Myrko
- 2 days ago
- 3 min read
Stewardship and engagement represent critical pillars of responsible investing, enabling investors to fulfill their fiduciary duties while actively influencing corporate behavior on environmental, social, and governance matters. These practices have evolved from peripheral activities to core investment strategies that preserve and enhance long-term value for asset owners.
Understanding Stewardship
Stewardship encompasses strategies investors employ as active owners of companies and entities. Originating from Old English words "stig" and "weard" referring to a guardian safeguarding assets, modern stewardship manifests through voting and engagement activities. Stewardship and Engagement , CFA Sustainable Investing Candidates
The Principles for Responsible Investment (PRI) Principle 2 states: "We will be active owners and incorporate environmental, social, and governance issues into our ownership policies and practices." This emphasizes stewardship extends beyond passive ownership to active involvement preserving and augmenting long-term value.
The Nature of Engagement Stewardship and Engagement , CFA Sustainable Investing Candidates
Engagement represents purposeful dialogue with specific objectives, frequently involving enhancement of companies' business practices regarding ESG issue management. With its emphasis on preserving and augmenting long-term value, engagement addresses wide-ranging issues including strategy, capital structure, operational performance and delivery, risk management, remuneration, and corporate governance. Effective engagement is often characterized as a systematic process rather than isolated interventions, requiring sustained effort and relationship building over time.
Key Characteristics of Effective Engagement
Effective engagement demonstrates seven essential characteristics: long-term focus on value preservation, in-depth company understanding, recognition that change requires time, consistent and honest communication, adequate resource allocation, efficient coverage maximization, and continuous learning from past experiences.
Forms and Styles of Engagement
Individual engagement ranges from generic letters across multiple holdings to tailored communications, housekeeping dialogue, active private engagement, and public engagement. Collaborative engagement includes informal discussions, collaborative campaigns, follow-on dialogue, soliciting support for targets, group meetings, collective engagement through coalitions like Climate Action 100+, and concert parties with concrete objectives.
Engagement follows top-down (company-focused) or bottom-up (issue-focused) approaches. Passive investors typically use issue-based methods while active investors favor company-focused strategies.
Practical Implementation and Escalation
Engagement begins with contacting company secretaries or investor relations, followed by board dialogue. Clear objectives and agendas help define purpose and establish accountability measures. Sharing agendas with companies ensures honesty and openness. Identifying potential barriers to change is crucial, as constructive dialogue should be private and may involve supporting existing change efforts.
When initial engagement fails, escalation involves higher-level executives or board members, with measures communicated in advance. Voting allows shareholders to signal their stance and influence behavior. Proxy voting enables appointing others to vote on their behalf, typically the company chair, though proxy advisors face criticism for inflexibility.
Engagement Across Asset Classes
While engagement is most developed in listed equities due to transparency and clear ownership structures, stewardship codes apply to all asset classes. In corporate fixed income, the PRI recommends that engagement should prioritize the size of holdings, lower credit quality issuers, key themes material to sectors, and issuers with low ESG scores. Fixed income investors focus more on ESG factors affecting balance sheet strength and debt default risks.
For private equity, infrastructure, and property investments, asset owners typically engage indirectly through managers, monitoring and engaging with the manager to ensure ESG factors are considered. Sovereign debt presents unique challenges, with limited scope for traditional engagement, though the PRI has produced a guide for engaging with sovereign issuers.
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