The International Corporate Governance Network (ICGN) celebrates its 25th anniversary this year, normally a time for great celebration, which had been planned for this year’s annual general meeting in Toronto. Covid-19 sadly derailed those plans as part of its broad wave of disruption. So while our ICGN conference remains on the agenda for 2021, the AGM took place this year virtually—like many other AGMs around the world.

A key item on the agenda was the revision of ICGNs Global Stewardship Principles (GSP), which were first published in 2016, as other stewardship codes were coming into place in markets around the world. The purpose of the GSP is to reinforce a core ICGN policy priority of making successful stewardship a reality. This is both an aspirational goal and a journey. But it is a journey that many in the investment community have embarked upon, and progress is being made— even if not all investors are at the same stage along this journey.

A global stewardship credential

ICGN’s GSP were developed to provide an international standard of reference for investors, regulators and standard setters with regard to investor stewardship. The GSP are also used by some institutional investors with global holdings as an international “passport” to present a global stewardship credential in markets where they may not be a signatory to a local stewardship code.

As of July 2020, 48 of ICGN’s investor members, representing US$17trn in assets under management, have formally endorsed ICGN’s GSP. The GSP have also been used by regulators in many markets as a global benchmark as they develop or update their own stewardship codes.

The ICGN GSP consist of seven principles:

1.  Internal governance: foundations of effective stewardship
2. Developing and implementing stewardship policies
3. Monitoring and assessing investee companies
4. Engaging companies and investor collaboration
5. Exercising voting rights
6. Promoting long-term value creation and integration of ESG
7. Enhancing transparency, disclosure and reporting.

Like stewardship codes that have developed in individual markets, the ICGN GSP emphasise many basic elements of the stewardship process, such as monitoring, engaging, voting and client reporting. But relative to other codes ICGN’s GSP is differentiated by starting with the internal governance of the investment firm itself as the first principle of stewardship.

The other distinguishing feature of ICGN’s GSP relative to many other stewardship codes (at least at the time) was its inclusion of ESG integration as a core principle. This reflects both economics and ethics.

ESG integration builds awareness of what an investee company’s interface is with its stakeholders and society more generally. They are fundamental drivers of long-term risk and opportunity for companies, economies and markets and are critical considerations for sustainable value creation.

Revisions to the ICGN GSP

The project to revise the GSP for the first time since their 2016 launch began in 2019 with an internal review and feedback from ICGN’s Board and Shareholder Responsibilities Committee, followed by a membership consultation. The revised GSP were ratified by ICGN members at its 2020 AGM.

While ICGN believes the 2016 principles were robust and fit for purpose, it made a number of specific changes or additions to reflect shifts in market practice and regulation and ongoing thinking about stewardship. The main changes in the 2020 GSP include:

• More emphasis on fiduciary duty and the “soft”, but real, issues of culture and values by institutional investors. Good stewardship requires not only policies and processes, but it is essential that investors embrace its underlying principles and adapt these within their organisations.
• An explicit link between fiduciary duty and long-term value creation, which is in turn directly linked to sustainable benefits for the economy, environment and society.
• The use of ESG factors in investment decision-making, as well as stewardship. ESG factors are clearly linked to long-term company performance and should be considered not only in the context of engagement and voting, but also in investment decisions relating to valuation and the buying or selling of financial assets.
• Greater focus on systemic risks relevant to institutional investors. It is important for investors to recognise that systemic risks, including those relating to pandemics, climate change, wealth inequality and corruption, can affect the sustainable value creation of individual companies as well as the health of economies and financial markets.
• More emphasis on the application of stewardship to asset classes beyond listed equities. Institutional investors invest in a wide range of assets on behalf of their beneficiaries, including corporate and public sector debt, private equity, real estate and infrastructure.
• Identifying capital allocation as an important topic for engagement for both creditors and shareholders. Creditors generally seek a stable and predictable credit risk profile and shareholders have a focus on upside potential and risk adjusted returns on capital. Capital allocation seeks to achieve a sustainable equilibrium between these potential tensions.
• Protecting voting rights against dual class shares and other forms of differential ownership which have the practical effect of marginalising stewardship and the accountability of companies to minority shareholders by diluting their voting rights.
• Encouraging investors to disclose more information about stewardship activities and outcomes. Stewardship has the greatest meaning when it is directly relates to practical outcomes, and not just a policy framework.

As ICGN begins its next 25 years, stewardship will continue to evolve and mature and the GSP will also remain a work in process. But we believe we have made progress with this latest set of revisions and look forward to continuing the journey.

George Dallas is policy director at the International Corporate Governance Network.