Recent research from UK consultancy SIFA Strategy reveals that the buy side is increasingly building areas such as stakeholder engagement, corporate behavior and culture into its investment decision-making models – either through integrated decision-making or stand-alone specialist investment funds.
The report, entitled ‘Culture, behavior and stakeholder engagement – Moving up the investor agenda’, which surveyed institutional investors with exposure to UK equities, notes: ‘The relevance of these new criteria will continue to grow as asset managers see the importance they play in investment returns and also in the demands placed on [them] to demonstrate stewardship.’
As a result, the report adds, investors welcome the expected changes to the UK Corporate Governance Code but, at the same time, ‘do not see it as a watershed moment.’ Instead, they ‘see it as regulation matching and supporting an already ongoing change in the variables they take into account in their investment decision-making.’
In turn, notes the report, this is going to create a significant new demand on boards and a new dialogue as part of the engagement with shareholders. ‘A key challenge is that much of this engagement will be through the chairman and non-executive directors, who historically have not had the necessary insight or responsibility to be custodians of some of these intangible assets, such as culture and corporate behavior,’ the report continues.
The challenge for every board therefore, is ‘that this demand will not be satisfied by a uniform standard response written in the annual report or a simple set of data – for example, the gender pay ratio. It’s far more complicated and will require more in-depth dialogue and evidence.’
This, the report concludes, can be seen as a major opportunity for UK-listed companies to demonstrate leadership and – importantly – differentiation. Those that embrace this change will be benefit in two significant ways, the report suggests: ‘Firstly, investors have already clearly identified that those companies that build engagement and governance into their business model, with bespoke metrics and a suitable strategic narrative, demonstrate improved commercial performance and long-term sustainable returns.
‘Secondly, companies that communicate and engage openly will gain an investor base that is aligned with their long-term plans.’
