Introduction

Investor stewardship, defined as responsible capital allocation and oversight to deliver long-term value for beneficiaries, has grown significantly due to rising client demand and policy initiatives, notably in the UK and EU. Passive investing’s expansion has highlighted active managers’ crucial governance roles amid concerns about declining oversight of investee companies. Yet, increased activity has heightened complexity, amplifying existing challenges and creating new obstacles. These include insufficient consensus on engagement practices, misalignment between asset owners and managers, inadequate reporting frameworks, poorly executed engagements, and commercialisation undermining stewardship legitimacy. This report focuses on actionable issues for engagement practitioners.

The foundations for effective stewardship

Effective stewardship necessitates clear engagement objectives aligned with client mandates. Industry consensus exists on stewardship’s broad aims—long-term value creation benefiting economy, environment, and society—yet definitions of engagement objectives and outcomes remain fragmented. Clarity in defining engagement objectives reduces miscommunication, ‘engagement-washing,’ and misaligned expectations. Objectives should distinguish between fact-finding engagements and those prompting real-world behavioural change. Company-level objectives must reflect broader investor strategy aims, including accelerating positive impact, limiting negative effects, improving business operations, and enhancing long-term success. Effective stewardship also encompasses addressing systemic risks beyond immediate business cases by engaging with policymakers and other stakeholders. Clearly defined objectives are essential, turning routine interactions into purposeful engagement activities with measurable outcomes. A structured milestone approach helps track and manage engagement progress effectively. Although attributing causality in engagements is resource-intensive and often unrealistic, evidencing correlation or active contribution remains viable.

Unlocking long-term value in a resource-constrained industry

Growing stewardship prominence requires increased resourcing, with current resources estimated to be only half of fiduciary needs. To maximise effectiveness with limited resources, asset managers must prioritise engagement on materially significant issues. A structured approach to prioritisation, focusing on financially and double-materiality relevant topics, enhances dialogues and effectiveness. For example, WHEB’s proactive engagements on emerging risks such as PFAS in apparel and biodiversity in wind turbine permits illustrate this approach.

Resource constraints can be managed through targeted, programmatic engagement, and clear escalation policies. Managers should employ escalation judiciously, prioritising intensified dialogues or collective actions before more aggressive measures such as shareholder resolutions. Recognising diverse strengths, large institutional investors might focus on market-level or systemic risks, while active managers should leverage deeper company-specific insights. Ultimately, prioritising engagement quality over volume will improve outcomes. Integration of stewardship activities, especially voting aligned with engagement, reinforces messages to management, while over-reliance on standardised third-party voting solutions undermines effectiveness.

Demonstrating effectiveness and ensuring alignment

Stewardship reporting generally remains poor, overly focusing on activity rather than effectiveness. Reports often lack clarity on engagement outcomes or the specific alignment with stated investor objectives. Effective reporting should demonstrate how activities directly support targeted outcomes, distinguishing correlation or contribution from causality. Clearly documented engagement objectives and interventions facilitate evidencing contributions, enhanced by contextual and temporal information. Key performance indicators (KPIs) and detailed case studies offer practical ways to report effectively, showcasing quantitative data supported by qualitative narratives. Reporting unsuccessful engagements transparently adds value, highlighting key insights.

WHEB’s approach includes linking engagement outcomes to high-level objectives, regular milestone tracking, aggregate quarterly data, and in-depth case studies to illustrate contributions. For broader issues, multi-year tracking, including indicators such as emission reductions aligned with Paris Agreement commitments, effectively demonstrate outcomes.

Conclusion

Effective investor stewardship creates value, aligning fiduciary duties, regulatory requirements, and client demands. Current stewardship complexities highlight the need for clearer industry definitions, prioritising materiality, quality engagements, and improved transparency. Better resourcing, integrated stewardship practices, and outcome-oriented reporting remain critical for advancing stewardship effectiveness and client value.