Investors have already developed highly effective tools to press companies to optimize their returns. These tools include environmental, social, and governance engagement designed to increase returns and decrease enterprise risk at individual companies. Yet the greatest threat to the long-term returns of diversified investors does not come from the failure of individual companies to optimize their own returns, but rather from the trillions of dollars in social and environmental costs businesses externalize annually. Diversified shareholders do internalize these costs, and the company-first lens of current shareholder engagement cannot adequately address company behavior that undermines long-term, broad economic health. Investors need tools to close this gap.
Four elements are essential to system stewardship: a legal foundation, a clear internal mandate, external mandates, and stewardship practices.
Below we describe the full range of open-source tools we are making available to satisfy each element, including those necessary for internal governance at a fund, creating systems-first asset management mandates, and engaging directly with companies.
THE FRESHFIELDS REPORT
SUMMARY OF THE FRESHFIELDS REPORT FOR SYSTEM STEWARDS
THE CAMBRIDGE PRINCIPLES
Including the stewardship philosophy articulated in the Cambridge Principles in an institution’s governance documents can provide a governing body with confidence that it is acting in the best interests of beneficiaries and provide clear guidance to staff and outside managers.
TSC has developed model language that can be adapted to use in an asset-management mandate to ensure that the manager is authorized to practice system stewardship.
The language from the Active Consultation document describing a proxy advisor’s role in system stewardship can be used as the basis for a system stewardship mandate for proxy advisors.
INVESTMENT BELIEFS AND PROXY-VOTING GUIDELINES
Adoption of proxy voting guidelines along the lines set forth in this model will give staff and advisors the direction they need to act on systemic issues and ensure that trustees have accounted for the full effect of their stewardship choices.
For asset owners and managers interested in engaging directly with companies on a system-stewardship basis, TSC provides full-service assistance on shareholder resolutions. TSC fully covers the cost of this service.
Guardrails allow investors to establish uniform limits on corporate behaviors that excessively externalize social and environmental costs. While guardrails do not replace engagement on specific issues, they can raise minimum performance expectations, providing investors and companies with confidence that there is a level playing field. To accomplish this purpose, guardrails should be universalizable, meaningful and measurable.
System stewardship involves engagement with companies that do not conform to the guardrails—not divestment, except in special circumstances. The primary implementation mechanism for companies that do not conform to a guardrail is engagement and voting against one or more directors. The ideas embodied in the Cambridge Principles suggest that investors could decline to provide new capital to such companies and engage in policy advocacy to support legal regimes that impose rules similar to the guardrails.
TSC and two Cambridge University institutions, the Center for the Study of Existential Risk and the Intellectual Forum at Jesus College, have worked with multiple experts to pilot a set of Guardrails. These are exemplary, illustrating the type of universalizable rule that could be adopted by all companies. For example, one guardrail would prohibit the opening of new oil and gas fields (because a Paris-aligned carbon budget is completely covered by current fields). The example is not meant to suggest that shareholders should also not be advocating for the wind-down of some current production, only that the expert panel did not develop a sufficiently universalizable rule for such wind-downs.
We hope that the publication of these examples will accelerate investors to build consensus around specific, uniform limitations on corporate practices that investors can apply so that the playing field for business becomes increasingly regenerative and decreasingly extractive.
For assistance using these resources, please contact us. TSC is a philanthropically funded organization and thereby covers the costs for this assistance. This information on this website does not constitute legal advice.
ABOUT SYSTEM STEWARDSHIP
Pension funds and other asset owners must preserve their capital and earn sufficient return to satisfy obligations to retirees and other liabilities. Asset managers must help investors to optimize their returns based on an acceptable level of risk. For owners and managers alike, returns are the result of three variables:
- The return of the market overall to the classes of securities within a portfolio (“beta”);
- The performance of the portfolio above or below beta based on the securities in the portfolio (alpha); and
- Costs and fees expended to manage the assets.
Historically, asset owners and managers (“institutional investors”) have focused on the second and third components and accepted beta as a factor over which they had no control and for which they bore no responsibility. The increasing recognition that the social and environmental systems upon which the global economy depends are at risk from corporate behavior demonstrates the deep flaw in that thinking; corporate behavior with respect to social and environmental systems affects the economy as a whole, and overall economic performance is a critical determinant of beta.
Moreover, shareholder activism in other areas demonstrates that shareholders can indeed affect corporate behavior. Thus, if shareholders can analyze the potential effects of their votes on corporate behaviors that affect the economy, they can—for the price of exercising a vote—make reasonable attempts to improve a critical facet of return. At a minimum, institutional investors should be open to the possibility that beta considerations can enter into proxy voting decisions.
Together, we're embarking on a fundamental transformation of our financial system...