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

Others invoke the term ‘woke’ capitalism and argue ethical governance should be left to politicians. In the 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.

Part of the disparity in views and lacklustre take-up relates to the broad definition of stakeholder. 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. We lack a common vision in finance of where we are heading.

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.1

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 financial institutions to push for positive systems change and sustainable market reforms – such as stewardship codes, regulations correcting market failures, and information for end-customer demand – are weak. This needs to change. And 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 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.

Ensuring we are all on the same page is no easy task

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.2

Terminology makes life even harder, and ensuring we are all on the same page is no easy task. Clearly labelled funds and marketing materials are prerequisites. The European Union’s Sustainable Finance Disclosures Regulation (SFDR), as well as 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.

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.

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

We also 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.3

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 sustainability targets. The same goes for effective corporate stewardship; holding the polluters and societal abusers to account is needed now more than ever.

Re-defining engagement and stewardship

Yet on their own they will not come close to being enough. The market does not always have the answer and consumer preferences do not always react fast enough to market failures.

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

Mitigating these kinds of impacts 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 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 concerns.4

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.

Aligning and assessing macro stewardship

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.

Stakeholder capitalism and ESG investing should be mutually inclusive and reinforcing

As well as systems thinking and a holistic mindset, it requires close alignment between micro and macro engagement and in the way capital is allocated. 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. 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

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.

Related views

Want more content like this?

Sign up to receive our AIQ thought leadership content.

Thank you for subscribing to receive our upcoming AIQ thought leadership. You will receive a confirmation email shortly.

To view our current live content, please visit our Views hub.

Please enable javascript in your browser in order to see this content.

I acknowledge that I qualify as a professional client or institutional/qualified investor. By submitting these details, I confirm that I would like to receive thought leadership email updates from Aviva Investors, in addition to any other email subscription I may have with Aviva Investors. You can unsubscribe or tailor your email preferences at any time.

For more information, please visit our privacy notice.

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business address: Level 27, 101 Collins Street, Melbourne, VIC 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.