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It is no small irony that the biggest source of capital in the world – tens of millions of savers who entrust financial nest eggs to investing institutions – has been missing in action in determining how asset owners and asset managers behave in their roles as agents when they own corporate equity.
But thanks to a series of unexpected, if long-overdue reforms, that cohort of grassroots savers is about to show up in force for the first time. Implications for corporate boardrooms and the global fund industry are vast, especially when it comes to environmental, social and governance factors (ESG).
In January 2018 the European Commission’s High-Level Expert Group on Sustainable Finance (HLEG) released its long-awaited final report, which points the way for near-term EU action. In it, the group spelled out its aim: “A sustainable future is one in which citizens are able to engage fully with the financial system as a whole and ensure that their money is being invested responsibly and sustainably.” To do that, HLEG went further than any recommendations before to invite citizen investors into the capital market tent. Pension funds, it asserted, ‘should ensure that they have a sound understanding of the broad range of interests and preferences of their members and beneficiaries, including ESG factors’. Further, the report declared that every investment agent has an obligation to ‘proactively’ seek out and incorporate ‘the preferences of clients, members and beneficiaries’ on key issues in ‘investment decision-making’, whether such issues are ‘financially material or not’. A handful of EU funds, such as APG and PGGM, already have mechanisms in place to regularly test member opinion. Most do not – yet.
As revolutionary as HLEG was in mapping a new role for savers in Europe, it may already be a lagging indicator. In the US, despite formal barriers against beneficiary participation in decision-making, researchers – and especially mutual funds sales forces – are detecting a marked new culture of savings expectations among millennials. Younger savers, especially women, increasingly want their investment agents to incorporate progressive social and environmental values into stewardship behaviour.