Model Mandate Part 5: Stewardship
PART 5: Stewardship
ICGN Global Stewardship Principles (2020)
Investors should exercise diligence in monitoring companies held in investment portfolios and in assessing new companies for investment (Principle 3)
Investors should engage with investee companies with the aim of preserving or enhancing value on behalf of beneficiaries or clients and should be prepared to collaborate with other investors to enhance engagement outcomes (Principle 4)
Investors with voting rights should seek to vote shares held and make informed and independent voting decisions, applying due care, diligence, and judgement across their entire portfolio in the interests of beneficiaries or clients (Principle 5)
At an individual company level investor stewardship helps to promote high standards of corporate governance which contributes to sustainable value creation. At an investor level, stewardship involves preserving and enhancing long-term value as part of a responsible investment approach. In a broader context, stewardship enhances overall financial market stability and economic growth, and, by focusing on long-term value creation, stewardship is directly linked to sustainable benefits for the economy, environment, and society.
For asset owners, being an active owner of the assets in which they have invested can generate long-term investment value. These benefits can accrue across asset classes including, for example, companies held through equity or bond portfolios or real estate through property or infrastructure mandates.
Some asset owners undertake this activity themselves, but many have limited in-house capacity to implement all aspects of stewardship. Where this is the case some will contract with specialist firms to undertake this work separately from the investment mandate, but most expect this to be part of the process of asset management.
In this regard, asset owners should aim to ensure, wherever possible, that the asset manager’s approach to exercising stewardship is fully consistent with the asset owner’s investment strategy, policies, and objectives over the appropriate time horizon. They should also ensure that the manager has the capacity to undertake the expected level and quality of monitoring and engagement.
- Appendix A lists some of the information about an asset manager’s approach and capabilities that asset owners might aim to obtain in order to identify one that is willing and able to meet their needs.
Some asset owners may wish to identify the most material issues that they believe should be a focus for stewardship activity. The simplest way of doing so is by reference to their responsible investment policy or investment guidelines, but asset owners may sometimes wish to specify more detailed objectives or instructions for individual mandates. This may particularly be appropriate for sustainable development investing mandates.
This can be done either by incorporating these specific requirements in the contract or appended to it through a separate schedule or side letter, the advantage of the latter approach being that it is easier to amend if the asset owner’s objectives or priorities change.
- The wording of Draft Clause 1 in Section 4.1 can also be adapted to cover any stewardship objectives or guidelines that are specific to the mandate.
Asset managers will also require clarity of which ownership rights and powers (such as voting at general meetings or taking the decision to divest) are placed in their hands by clients to be exercised as they choose, those which must be exercised in line with policies specified by the client, and those that require client approval. Where client direction is required, the investment management agreement should set out the criteria for determining when the asset manager should notify the asset owner of their concerns and the procedure for doing so.
Engaging with and voting on investee companies are not the only ways to promote the asset owner’s investment objectives. An increasing number of asset owners and managers consider participation in public policy debates to be an important element of stewardship. Many also participate in sectoral or regional initiatives in order to have a greater impact than they could achieve on their own. Asset owners may wish to make use of their mandates to encourage managers to participate in such activities if doing so will support the achievement of their investment objectives.
- Section 4.3 of the guidance contains a draft clause (Clause 10) intended to ensure the asset manager participates in activities intended to address systemic risks; asset owners may wish to consider adapting that draft clause to address their policies and objectives more broadly. Alternatively a more broadly worded draft clause is included in this section.
Asset owners will also wish to ensure that they have the ability to monitor how the asset manager is performing its stewardship obligations on the owner’s behalf. The frequency and format in which the manager will report to the client should be specified either in the IMA or in a separate schedule or side letter appended to the investment management agreement
As noted in Section 4.4 of the Model Mandate, stewardship services are not always covered by the asset manager’s standard fee. Where this is not the case, the investment management agreement should specify which services are and are not covered by the fee and the financial arrangements for those services that are not covered.
5.1 DRAFT CONTRACT CLAUSES
GENERAL DRAFT CONTRACT CLAUSES
Stewardship practice: Requiring the asset manager to adhere to good practice in terms of stewardship.
Clause 13: Monitoring
The Manager shall, in accordance with the policies and standards set out in Schedules A [and/or B], engage in such activities as are appropriate in the circumstances to monitor and influence the management of the [investee companies/underlying funds/underlying assets], where such activity is considered by the Manager to be likely to enhance the value of such securities or assets or the portfolio as a whole and in the best interests of the Client. In so doing, the Manager commits to adhere to the principles of the ICGN Global Stewardship Principles [and relevant national Stewardship Codes].
The Manager shall consistently encourage the management of the [investee companies/underlying funds/underlying assets] to adhere to its [or the Client’s] Responsible Investment Policy [and/or the standards set out in Schedule B] and to prevent, mitigate and remedy any negative impact that they are causing or are directly linked to through their business relationships.
Engagement: Encouraging the asset manager to take part in collective engagement.
Clause 14: Collective engagement
The Manager shall participate in collective and collaborative engagement efforts with the management of the [investee companies/ underlying funds/ underlying assets] where it considers it to be the most effective means of achieving compliance with its [or the Client’s] Responsible Investment Policy [and/or the standards set out in Schedule B}. .
Shareholder rights: Clarifying which ownership rights and powers are in the hands of the asset manager and which retained by the client. The need for a clause of this sort may depend on the extent of delegation of stewardship activities to the manager.
Clause 15: Engagement
The Client retains the following rights in respect of assets held in the Portfolio [delete as applicable]:
The Manager is granted authority to carry out the following rights in respect of assets held in the Portfolio [delete as applicable]:
The Manager undertakes to raise with the Client situations in which the exercise of some of these rights might be appropriate.
Extraordinary concerns: Requiring the asset manager to alert the client to any significant concerns about specific investments.
Clause 16: Inform
In the event of any significant concerns about an investment or the performance, activities or behaviour of an investee company [that cannot be resolved through engagement with the company concerned], the Manager shall inform the Client [immediately or within a specified time period]. The Manager shall proactively inform the Clients about possible remedies, which may include voting against management, engagement, collaborative engagement, filing of a shareholder proposal, calling a special meeting, divestiture, litigation or some combination thereof.
SDI-RELATED EXAMPLE CLAUSES
Example 1: Identifying SDIs
The Manager shall engage with all [investee companies [or investments] [that it has identified as Sustainable Development Investments (SDIs) – if the Client wishes to prioritise engagement of these investments rather than across the portfolio as a whole, for example, in order to make best use of limited resources] to assess whether the desired sustainability outcomes are likely to be achieved, and shall report at least [insert agreed frequency] to the Client on its assessment.
Example 2: Assessing SDG Risks
In carrying out its duties under this Agreement, the
Manager shall conduct annual assessments to identify
material risks associated with the 17 Sustainable
Development Goals [or specific SDGs]. The assessment
shall be used to identify [investee companies or
investments] to be engaged by the Manager. The purpose
of the engagements shall be to improve the performance
of the investments with respect to the SDGs. The
engagement shall include objectives and milestones to be
achieved, recognizing that improvements can require time.
The Manager shall report at least [insert agreed frequency]
to the Client on its assessment and activities.
Example 1: Net-zero transition
The Manager shall actively engage with portfolio companies [or investments] to take action to [reduce
greenhouse gas (GHG) emissions across the value chain
to move towards net-zero emissions by 2050 or sooner [–
or other specified SDG outcome].
The Manager shall report on its engagement activity to the Client at least [insert agreed frequency], detailing in respect of both ongoing engagements as well as those that have concluded:
- why companies were selected and prioritized for engagement;
- what the [climate-related] objectives for the engagements were;
- what methods of engagement were used; and
- what improvements in SDG performance were achieved
- following engagement.
Example 2: Human rights
The Manager shall publicly state its support for
international principles and standards on human rights
including, where relevant, the:
- United Nations Universal Declaration of Human Rights;
- International Labour Organisation’s labour standards;
- United Nations Guiding Principles for Business and Human Rights;
- United Nations Global Compact; and
- The OECD Guidelines for Multinational Enterprises.
The Manager shall engage with investee companies about their management of human rights issues in accordance with hard and soft laws. The Manager shall report to the Client at least [insert agreed frequency] issues identified, and actions taken – through engagement with investees or policy makers – to prevent or mitigate negative outcomes.
Example 1: Collective engagement
The Manager shall identify and exploit opportunities for collaboration with other investors to leverage influence and provide consensus on desired engagement outcomes in relation to [specified SDG outcomes] and shall report to the Client at least [insert agreed frequency] on:
- the collaborations in which it has participated;
- what role it played in those collaborations;
- the companies with which it was engaged; and
- the impact of the engagements achieved
Some asset owners prefer to retain control of their voting rights and vote either directly or through an agent. Some prefer to delegate responsibility for voting to the asset manager but expect them to vote in accordance with the owner’s responsible investment policy and/or voting guidelines.
Others will completely delegate voting decisions to the asset manager. For some mandates, for example If the asset owner is investing in a pooled fund, this may often be the only option offered by the asset managers, although some managers now offer greater proxy voting choice.
Whatever the preferred approach, it should be specified in the investment management agreement.
If asset owners intend to instruct asset managers to follow the manager’s own voting policies and guidelines when voting on the owner’s behalf, the owner should ensure that the manager’s policies are compatible with their own policies and beliefs. This should be assessed as part of the selection process.
- Appendix A lists the information about an asset manager’s voting policies, guidelines and practices that might be sought during the selection process.
Where voting is to be delegated to the manager asset owners should ensure they have the ability to exercise oversight. In these cases the investment management agreement should specify the frequency and format in which the asset manager will report to the client and if the manager has been instructed to vote in accordance with the client’s policies.
Many asset managers will engage proxy advisers to provide them with voting recommendations and/or to execute votes on their behalf. In these circumstances, asset owners will want to be satisfied that these third parties are applying the agreed policies when making their recommendations.
- Section 5.3 contains guidance on the oversight of third parties engaged by the asset manager.
5.2 DRAFT CONTRACT CLAUSES
GENERAL DRAFT CONTRACT CLAUSES
Vote execution: Setting out the basis on which the underlying shares are to be voted.
Clause 17: Vote discretion
Alternative 1 [where the Client or its agent has voting control]:
The Manager shall enable the Client or its designated agent to direct the exercise of any voting rights attached to the Portfolio investments. [The Manager shall provide the Client with ballots and vote recommendations (if requested) [X] days ahead of the date for voting].
Alternative 2 [where the Manager votes according to Client guidelines]:
The Manager shall procure the exercise of any voting rights attached to the Portfolio investments in accordance with the Client’s expressed voting guidelines, as attached at Schedule [A or D].
Schedule D – the Client’s voting guidelines, where not contained in their responsible investment policy (Schedule A – see Part 4.1)
Alternative 3 [where voting control is delegated to Manager]:
The Manager shall procure the exercise of all voting rights attached to the Portfolio investments on the Client’s behalf, in accordance with the Managers’ voting policy and any specific guidelines approved by the Client.
[Where the option of disapplying the Manager’s policy exists: The Client reserves the right to rescind, upon [X days] advance written notice, the Manager’s authority to make voting decisions for specific companies, issues or time periods. The Manager shall use best endeavours to facilitate such Client voting decisions to be implemented].
Clause 18: Conflicts
The Manager shall have in place appropriate written policies to manage any conflicts of interest in relation to voting matters, details of which shall be shared with the Client.
Client reporting: Establishing how the asset manager will report to the client on how it has exercised the voting rights (where authority rests with the manager).
Clause 19: Report content
The Manager shall report [insert agreed frequency] to the Client on how they have voted on the Client’s behalf in the previous reporting period, including:
SDI-RELATED EXAMPLE CLAUSES
Voting rights and oversight
Example 1: Proxy voting
In carrying out its duties, the Manager shall disclose to the Client how the SDGs inform its proxy voting guidelines [or the way it has applied the Client’s voting policy]. The Manager shall also disclose at least [insert agreed frequency] [examples of] actual cases where proxy votes have been cast in a manner to support the SDGs.
Example 2: Resolutions outside voting policies
In the event of a resolution raising material SDG concerns
that are not explicitly covered in the [Client’s/ Manager’s]
voting policy, the Manager shall consult the Client before
exercising the voting rights.
Many asset managers will themselves have contracts with third parties to assist in the delivery of the mandate. In some cases this will be purely to obtain research or advice, but in others it may involve delegating stewardship activities (for example, vote execution or engagement overlay services).
Sub-delegating activities does not reduce the contractual and/or fiduciary responsibility of the asset manager for ensuring that the terms of the agreement between them and their client are being met, and must not adversely impact the asset owner’s ability to meet its fiduciary duties.
The delegation and sub-delegation of investment or management tasks should not reduce the flow of material information to the asset manager’s clients or compromise the standards of service to which they are entitled.
The IMA should make it clear that the asset manager remains accountable for all activities that have been delegated, that they are being carried out in a manner consistent with agreed investment approach and policies, and should be able to explain what assurance will be provided to the client that the manager is undertaking the necessary oversight of such activities.
Asset owners should also seek information about the extent to which the asset manager delegates functions to third parties and how it monitors the performance of whose functions as part of the selection process.
- Appendix A contains more details on the information asset owners should obtain on the use of third parties
5.3 DRAFT CONTRACT CLAUSES
GENERAL DRAFT CONTRACT CLAUSES
Disclosure: Ensuring that the asset manager discloses which third-party services its employs and that the provision of these services is in alignment with the client’s investment and stewardship interests.
Clause 20: Responsibility
The Manager remains responsible to the Client for any activities delegated to third parties.
Where the Manager delegates any of the activities specified in this Agreement to third parties it shall establish relevant guidelines to ensure that they are conducted in a manner consistent with the Client’s [or Manager’s] Responsible Investment Policy [and/or Voting Policy] set in [Schedule A and/or D].
The Manager shall ensure that the third parties adhere to these guidelines, and report [at least annually] to the Client on which third parties have been engaged and how its guidelines have been implemented.
Policy Alignment: Ensuring that, where the asset manager uses the voting policy of a proxy advisory firm or other third party, this policy is aligned with the client’s interests
Clause 21: Consistency
Where the Manager intends to apply the voting policy of a proxy advisory firm or other third party, it shall satisfy itself that such policy is consistent with the Client’s [or Manager’s] Responsible Investment Policy [and/or voting policy] and explain to the Client why it considers that to be the case.
Securities lending (also known as stock lending) is the practice of lending clients’ shares subject to a buyback right. Often this activity is under the client’s control, but on occasion the stock lending programme is in the hands of the asset manager. This is particularly the case in pooled funds.
Whichever approach applies, it will be important to ensure that both parties have access to relevant information, which should include details of current positions and transparency on fees earned.
Particularly in order to deliver stewardship responsibilities, both parties should agree policies or criteria that will be used to determine which stocks are subject to lending at given times. Some asset owners may prefer not to engage in stock lending at all while others prefer to set criteria limiting its use - for example, that stocks with voting rights attached cannot be lent during voting periods.
Where stock lending is permitted the asset owner and manager may need to agree the basis on which one or either party can trigger a recall of lent stock, either so that it is not potentially in the hands of a party whose interests diverge from those of the client or so that the parties can exercise stewardship rights in full (for example, so that they can exercise the voting rights attached to the stock).
The ICGN Guidance on Securities Lending sets out the responsibilities of the different parties involved in lending transactions and good practices for primary lenders, lending agents and borrowers.
5.4 GENERAL DRAFT CONTRACT CLAUSES
GENERAL DRAFT CONTRACT CLAUSES
Scope and responsibilities: Specifying the extent to which stock lending is permitted; clarifying which of the parties will have visibility of the level of stock lending and any lent positions at a given time; which will have responsibility for those positions; and which will have the authority to recall lent securities for stewardship and voting purposes.
Where lending is not permitted
Clause 22: Limitations
Unless otherwise agreed in writing, the Manager shall not undertake any stock lending, stock borrowing, repurchase or reverse repurchase arrangements in relation to assets in the Portfolio.
Where lending is permitted
Clause 23: Policies
Alternative 1 [where lending is to be done by the Manager]:
The Manager shall disclose to the Client its policy on stock lending. This policy shall align with any specific policy adopted by the Client [and/or with the ICGN Guidance on Securities Lending] and state that stocks shall not be lent with the exclusive or primary intent to exercise a vote regarding a investee company.
Save as agreed from time to time between the Manager and the Client, the Manager may enter into arrangements to lend to a third party investments and other assets or documents of title or certificates evidencing title to investments and other assets held in the Portfolio. The Manager agrees to make available to the Client a list of Portfolio investments out on loan at any given time, on the basis laid out in Schedule E.
[Schedule E - Format for Manager reporting to Client, or Client reporting to Manager, of relevant stock out on loan]
The Manager agrees that the Client or its agent may from time to time provide a list of those investments or assets which shall not be lent or shall promptly be recalled if out on loan. No new loans will be made of these listed investments or assets, and recalls will be triggered as soon as notice is given.
The Manager shall consider whether it should recommend to the Client that any individual investment or asset, or class of investments or assets, should be excluded from lending activities from time to time to protect the value of the Portfolio, minimise systemic risks or exposure to other risks.
The Manager shall report at least [insert agreed period] on (a) holdings which were recalled for proxy voting, specifying how such votes were cast, and (b) holdings which were on loan and not voted by the Manager on matters involving [specify key Client voting issues, such as shareholder proposal(s) filed by the Client or voting relating to priority topics].
Alternative 2 [where lending is to be done by the Client or its agent]:
The Manager shall not arrange for any Portfolio investments or documents of title or certificates evidencing title to such investments to be lent to any third person.
The Client agrees to make available to the Manager a list of Portfolio investments out on loan at any given time, on the basis laid out in Schedule E.
The Client undertakes to consider any recommendation from the Manager that any individual investment or asset, or class of investments or assets, should be excluded from lending activities from time to time to protect the value of the Portfolio.
SDI-RELATED EXAMPLE CLAUSES
Example 1: Recall agreement
Stocks held in Sustainable Development Investments [and/or investments identified as raising concerns relating to specified SDGs] shall not be lent under any circumstances [or without the explicit agreement of the Client – where the Manager does the lending] or shall always be recalled for the purposes of exercising the voting rights.