what are guardrails?
Investor-determined guardrails define parameters within which companies must operate to safeguard diversified portfolio value.
Investors determine minimum parameters for companies to protect vital social, environmental, and economic systems. These standards proscribe company practices that damage diversified portfolio value as we describe on our system stewardship page.
Unlike current ESG standards, guardrails must be developed outside of companies, so that they’re set with a view toward maximizing the overall value of the economy and diversified portfolios, not the value of individual companies or industries involved in the negotiation.
This strategy avoids the trap of individual company engagement. Individual companies are internally focused, and not structured to address the broad systemic concerns that matter most to diversified investors. Guardrails address this natural conflict of interest.
Once a guardrail is established, investors announce the guardrail and take steps to ensure companies stay within it. These steps include:
- Voting against directors at public companies that don’t follow guardrails;
- Voting against going-private transactions that don’t include guarantees to adhere to guardrails; and
- Ensuring that companies entering the market through IPOs are committed to guardrails.
Investors also use their influence as limited partners to ensure that private equity, venture capital, and hedge fund sponsors bring portfolio companies within guardrails. Even companies not adequately subject to such governance tactics can be affected through their participation in supply chains.
For case studies demonstrating how investors can apply guardrails to reduce or eliminate damage to diversified portfolio value from climate change and antimicrobial resistance, click here.
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