Constructing a stewardship portfolio
While many sustainable funds have a notable style bias — they often tilt towards growth or tech investing — the long-term focus of stewardship aligns with building a diversified portfolio that is balanced in terms of its sector exposures and where the main drivers of risk and return are stock-specific. This diversification and focus on stock selection reduces country, sector and factor biases and increases the potential to generate stock-specific, above-market returns (alpha) that can result from strong stewardship.
In our view, strong candidates for stewardship investing that prioritise the business, stakeholders and shareholder returns over growth can be found in any high-return and less cyclical sector. Good stewards are typically high-quality businesses, which could potentially result in stewardship portfolios being less volatile than the broad market, helping to produce more stable and consistent outperformance over time.
Strong investment credentials in ESG, fundamental research capabilities and deep sector expertise are essential skills for asset managers to engage with companies and research proxy issues from a stewardship perspective. Of course, ESG is an evolving concept, so it’s important to constantly engage on different topics and push the agenda forward to hold company leadership to account on the material issues that differentiate leaders over time. Building long-standing trust creates the goodwill to access both management teams and, importantly, boards, enabling high-level and deep two-way dialogue on strategy and execution.
During our engagements, our ambition is to share best practices and encourage change. And if progress isn’t forthcoming, divestment is always an option. For instance, we've divested companies that weren't embracing the type of robust climate strategy that we thought was appropriate for their business and their risks, or that weren’t managing and allocating capital in a way that appeared to be responsible or sustainable.