Asset managers and other financial institutions have a duty to act in the best interests of their customers and society. Macro stewardship will be crucial to meeting these responsibilities, argues Mark Versey.

Read this article to understand:

  • Why old notions of stakeholder capitalism are no longer fit for purpose
  • What we mean by macro stewardship how it can help address market failures
  • Why macro stewardship must align with corporate engagement and capital allocation 

Stakeholder capitalism has come under fire from multiple directions recently. Caught up with a rising backlash against ESG investing, some hard-line commentators argue it is vague and lacks teeth.

They claim grand business commitments are nothing more than disingenuous PR statements – undermining the whole movement. Others invoke the term ‘woke’ capitalism and argue ethical governance should be left to politicians. In the now infamous – but often narrowly quoted – words of Milton Friedman, they believe the role of business should be simply “to increase its profits”.

The critics are wrong: in my view, a more nuanced and inclusive form of capitalism will lead to much better outcomes for societies and economies than a model that pursues profit alone. However, stakeholder capitalism must become more substance than slogan if it is to help tackle the biggest issues we face, from the climate crisis to rising social inequality.

The primacy of shareholder primacy

The first “Davos Manifesto,” published by the World Economic Forum in 1973 (or European Management Forum as it was then), sought to codify stakeholder capitalism and declared “the purpose of professional management is to serve clients, shareholders, workers and employees, as well as societies, and to harmonize the different interests of the stakeholders”.1

Part of the disparity in views and lacklustre take-up relates to the broad definition of stakeholder. Edward Freeman arguably characterised this best when he defined a stakeholder as “any group or individual who can affect or is affected by the achievement of the organisation's objectives”.2 The net result is an accountability void: where no one feels agency or pressure to make changes, the resulting paralysis leaves the global commons to rot in the process.

In recognition of the failure of stakeholder capitalism to wrestle control from shareholder primacy, Klaus Schwab (WEF’s founder and chair) issued a new manifesto in late 2019.3 And while much progress is being made to try and plug the gaping hole emerging between the aspirations of those seeking to shift the economy to a fairer footing, we lack a common vision in finance of where we are heading.

From almost nowhere, we are buried in a tidal wave of consultations on sustainable finance taxonomy, labelling standards, definitions and regulatory concerns of greenwashing. This is critical work and shows all the classic hallmarks of a system at the outset of a transition.

Indeed, initiatives like the Taskforce on Climate-related Financial Disclosures and the Taskforce on Nature-related Financial Disclosures – both of which we strongly support – are important step changes in this process. Enhanced disclosures will create greater transparency around ESG-related issues that are increasingly recognised as ‘material’ to businesses’ bottom line.

But more needs to be done for a workable form of stakeholder capitalism to take hold. After all, 1.5°C of warming is not just a ‘least-worst’ option, it represents a “planetary boundary”.4 Once crossed, we risk not only setting off negative feedback loops that dramatically increase the pace of warming, however quickly we cut emissions, but also crossing “tipping points” and moving to a different “system state” from which there is no return.5

While we can and have recovered from financial crises, a collapse is irretrievable

We are already experiencing the effects of around 1.2°C of warming and are currently heading for in excess of 2°C of warming by 2100. The physical impacts by the end of the century could undermine the financial system as we know it, with finance crossing its own tipping points to trigger a chain reaction of negative feedback loops like toppling dominos.

The financial system stores up significant systemic risk and interdependencies between its three limbs of insurance, banking and investment. If one element were to fall, it could bring the whole system crashing down. This would not be a financial crisis; it would be a collapse. While we can and have recovered from financial crises, a collapse is irretrievable.6

Tariq Fancy, former BlackRock chief investment officer for sustainable investing turned whistleblower, argues responsible investment efforts undermine the sustainability agenda as they distract governments from intervening in existential threats like climate change.

His frustrations are understandable, but he misses a key point: the latent power lying dormant in investor portfolios to create real and lasting change, as well as a requirement for asset managers and consultants to try to maintain the integrity of markets and protect clients’ capital in the process.

The investment industry can ensure greater accountability and transparency on the sustainability issues investors care about

At the heart of the challenge is a complex and delicate dance between consumer and end investor demand on the one side, and governments and regulators on the other. Asset managers and investment intermediaries are wedged in the middle – the appointed agents and stewards in capitalism’s great game.

It is a crucial role. If done well, the investment industry can ensure greater accountability and transparency on the sustainability issues investors care about.

Unfortunately, the incentives for asset managers and other key financial institutions to actively push for positive systems change and sustainable market reforms – such as stewardship codes, regulations correcting market failures, and transparency for end-customers – are weak at best. This needs to change. Something we call macro stewardship can help ensure it does.

Financing green, and greening finance

In an environment where people can easily express their views via the ballot box and wallets, it seems strange that, aside from impact investing (which accounts for a tiny proportion of overall investment assets), we have no clear way of capturing clients’ sustainability values in mainstream funds. As an industry, we need to do a far better job of incorporating this information with clients’ investment profiles and our own engagement activity to make sure it aligns with the issues they care about most.

If we get this right, it will take us much closer to ‘democratising finance’. Shifting the power from the firm to the customer could be a real force in the investment community.7

MiFID II – though only applicable to the EU – is changing the rules on capturing sustainability preferences within financial advice, but the behavioural minefield of framing biases and potential return versus values trade-offs make accurate assessments and conclusions tricky. The training gaps for advisers (both real and robo) are huge.

The issue is not with the term ESG, but with us

Terminology makes life even harder, and ensuring we are all on the same page is no easy task.

Take the term ESG, which has become a catch-all for a hugely complex and nuanced area of investing. It is no wonder some people are calling for it to be retired. The issue, however, is not with the term, but with us. We can replace the term with another one – but fast forward five years or so and, just like its predecessor, the newly anointed term will also mean different things to different people. The devil is in the detail.

First and foremost, there are different types of sustainable investing. We need to be clear about the differences between integration, screening (including positively screened thematic funds, such as impact) and engagement – accepting they are not necessarily discrete endeavours.

Clearly labelled funds and marketing materials are prerequisites. The European Union’s Sustainable Finance Disclosure Regulation (SFDR), as well as its Green and Social Taxonomies, are welcome, as is the expectation the UK will follow suit with its Sustainability Disclosure Regulation (SDR) and fund-labelling regime.

Improvements can come not only from governments but also through civil society campaigns

However, the extent to which a product provider is advocating for a more sustainable system should also be one of the factors consumers consider when choosing someone to manage their money. And yet education and clear signals are required to support such value judgements.

Improvements can come not only from governments in enhancing transparency and financial literacy to promote more informed choices, but also through civil society campaigns like Make My Money Matter and NGOs like ShareAction. As the former campaign points out so clearly: “Having a green pension could be 21 times more effective at reducing your carbon footprint than stopping flying, going veggie and switching to a green energy supplier.”8 Technological aids like Tumelo will be essential to navigating the murky world of end-investor preferences.

Despite all this great work and momentum, I still worry the vast sums of ESG-related money will fall short of their intended goal.

We need to redeploy existing capital at scale, and the faster we stop financing the bad stuff, the easier it will be. We don’t need more sustainable finance as though it was a separate category of money; all of finance needs to become sustainable.9

We need to be far more ambitious and innovate the system itself

This is a subtle, but massive distinction – one many investment professionals, practitioners and market commentators have yet to grasp. To be clear, we need green finance and as much of it as possible to help with the transition to net zero and other key sustainability targets. The same goes for effective corporate stewardship; holding the polluters and societal abusers to account is needed now more than ever.

Yet on their own they will not come close to being enough. Thematic investing and corporate engagement represent micro nudges when we also need macro-level, systemic change. To put it another way, it is like taking a pea shooter to a gun fight. We need to be far more ambitious and innovate the system itself, including the supporting multilateral architecture that sits around it.

Re-defining engagement and stewardship

The market does not always have the answer and consumer preferences do not always react fast enough to market failures. We do not have time to wait for demand to right-size and see how things turn out. That is one point I agree with Mr. Fancy on.

As already alluded to, we need to improve and correctly interpret standards, investor norms and regulation.

We need to improve and correctly interpret standards, investor norms and regulation

Principle 4 of the Financial Reporting Council’s 2020 UK Stewardship Code, which Financial Conduct Authority (FCA) rules requires all asset managers to adhere to on a comply or explain basis,10 expects signatories to “identify and respond to market-wide and systemic risks to promote a well-functioning financial system”. Similarly, stewardship is defined in relation to its capacity to lead to “sustainable benefits for the economy, the environment and society”.11

We also see the FCA increasingly referring to its statutory market integrity objective. For example, in its discussion paper on its forthcoming SDR and policy statement on enhanced climate-related disclosures, it states the desired outcome of these interventions is protecting and enhancing the integrity of the UK financial system. This is through improved assessment of sustainability and climate-related matters across the market, resulting in more informed pricing and capital allocation decisions.

According to the EU’s Sustainable Finance Action Plan (SFAP), financial market participants are required under SFDR to articulate how they take action to mitigate against principal adverse impacts (and if they do not, why not). Similarly, they must explain how they integrate sustainability risks into investment decisions. Under SFDR, while sustainability risks are deemed to be already or potentially financially material to investments, “principal adverse impacts” are characterised by their material impact on the environment and society.

We need to ensure the financial system is one that has integrity and is not undermined by market failures

Mitigating these kinds of impacts often requires systems-level thinking. And macro stewardship could help bring about the corrections needed for the market to price in externalities that are not yet internalised. These include the true cost of carbon, the threat of antimicrobial resistance, water or air pollution and the hidden costs of curtailing talent through diversity and inclusion failures – along with many others.

To truly act in the best long-term interests of our customers, we need to not only advocate for a sustainable system, but also ensure – to the extent we have tools at our disposal – the financial system is one that has integrity and is not undermined by market failures. Stewardship in the fiduciary sense is being redefined and re-written in response to these sustainability concerns.12

The main tools we have are our voice, expertise and authority to support and influence policymakers. For while it is they who have the authority and mandate to address these failings, it is market participants who have the resources, access to information, and expertise to identify them and suggest appropriate corrections.

We launched a climate manifesto and plan to launch a School for Systems Change in the near future

Examples of interventions we have made include helping to draft the precursor to the EU’s SFAP through its High-level Expert Group, as well as convening a group of industry experts and public policy officials from around the world to discuss how to best harness finance to meet the goals of the Paris Agreement. The main proposal is to create an International Platform on Climate Finance that can provide advice and capacity building for UN member states to raise climate finance; promote, advise on and analyse climate commitments from private financial services actors; and act as a market thermometer.

More recently, we launched a climate manifesto that outlines the leverage points and changes required across the entire international financial architecture. And to help embed macro stewardship throughout the asset management industry, we plan to launch a School for Systems Change in the near future.

To reiterate, stewardship cannot and should not be limited to engagement with individual companies. The biggest risks cannot be mitigated through action by any single entity.

Aligning and assessing macro stewardship

That the debate sparked by Friedman about shareholder primacy continues to rage to this day is partly because his comments have frequently been taken out of context. In a forgotten part of the article referenced at the start of this piece, he also said the responsibility of a corporate executive is to “make as much money as possible while conforming to their basic rules of the society; both those embodied in law and those embodied in ethical custom”.13

Stakeholder capitalism and ESG investing should be mutually inclusive and reinforcing

Where I disagree with Friedman is over his definition of what it means to be a socially responsible company. He was wrong to define it as doing things other than the core business. Meeting basic rules of society, whether on labour standards, environmental protection or good governance standards, are fundamentally important to all businesses.

Stakeholder capitalism and ESG investing should be mutually inclusive and reinforcing; the former cannot work without a properly functioning latter. And for stakeholder capitalism to work – or stick – incorporating macro stewardship into everyday ESG activity is essential.

As well as systems thinking and a holistic mindset, it requires close alignment between micro and macro engagement. Engaging with companies, sovereigns, state-owned enterprises, policymakers and other influential changemakers in a considered and coordinated way will ensure maximum impact from minimal resource deployment. People, time and money are always constrained. Alignment for us comes in the form of three pillars – people, climate and Earth – that link closely to the UN Sustainable Development Goals.

Take climate change. At the same time as engaging ‘with teeth’ via our climate engagement escalation programme, where high-risk and/or high-impact companies are given a deadline by which progress needs to be made to avoid divestment, we also advocate for policy and systems change on multiple fronts.

Tinkering around the edges will not be enough. We need to start actively changing the system itself

As new standards of stewardship emerge, judging asset managers on their ESG promises at a fund level will not be sufficient. Scrutiny at a firm level – on genuine commitments and action to correct market failures to improve public welfare – will be critical. Consultants and fund selectors have a pre-existing model for incorporating firm-level assessments and these should be expanded and updated to include macro stewardship ratings. Other key investment gatekeepers will need to adjust their thinking accordingly. Macro stewardship could also form a useful shield against accusations of greenwashing.

I have seen many phases in responsible investing. This era, where targeted corporate engagement and macro stewardship initiatives combine with the reallocation of capital towards more sustainable investments, is by far the most exciting.

Never has so much interest and, more importantly, capital flowed towards the sector. But if we are to properly harness it to avert environmental and societal disasters, tinkering around the edges will not be enough. We need to start actively changing the system itself.

Macro stewardship definition

We define positive macro stewardship on sustainability issues as:

“Financial institutions actively engaging governments, policymakers, non-governmental organisations, academics and other key influencers to correct material market failures on sustainability issues.”

Macro stewardship actively seeks to change the incentives in the financial system to harness the profit motive and drive more sustainable outcomes. It addresses issues that are material to the delivery of the UN Sustainable Development Goals (SDGs) and long-term economic growth (GDP). In other words, it seeks to promote long-term sustainable development.

It should be conducted transparently wherever possible, and include initiatives on which an institution has taken a clear leadership role and those that result from collaboration between others in finance and the real economy.


  1. Klaus Schwab, ‘Davos Manifesto 1973: A code of ethics for business leaders’, World Economic Forum, December 2, 2019
  2. Edward Freeman, ‘Strategic Management: A Stakeholder Approach’, Cambridge University Press, 1984
  3. Klaus Schwab, ‘Davos Manifesto 2020: The universal purpose of a company in the fourth industrial revolution’, World Economic Forum, December 2, 2019
  4. Fiona Harvey, ‘Climate experts warn world leaders 1.5C is ‘real science’, not just talking point’, The Guardian, October 30, 2021
  5. Fiona Harvey, ‘Climate experts warn world leaders 1.5C is ‘real science’, not just talking point’, The Guardian, October 30, 2021
  6. James Vaccaro, ‘Blip, crisis or collapse: why financial regulators need to prepare for more than a climate crisis’, Green Central Banking, May 26, 2022
  7. Steve Denning, ‘The triumph of customer capitalism’, Forbes, January 10, 2020
  8. ‘Act now: Question your pension’, Make My Money Matter, as of August 2022
  9. Article 2.1.c of the Paris Agreement: “Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.”
  10. ‘FCA Handbook : COBS 2.2.3 Disclosure of commitment to the Financial Reporting Council’s Stewardship Code’, Financial Conduct Authority, as of August 2022
  11. ‘The UK Stewardship Code 2020’, Financial Reporting Council, 2020
  12. ‘Markets’, Financial Conduct Authority, as of August 2022
  13. Milton Friedman, ‘The social responsibility of business is to increase its profits’, The New York Times, September 13, 1970

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