Why institutional investors require stewardship rating

Stakeholders during the launch of the Nairobi Securities Exchange (NSE) Environmental, Social and Governance (ESG) Disclosures Guidance Manual at the Nairobi Serena Hotel on November 29, 2021. PHOTO | DIANA NGILA | NMG

By HILLARY BIWOTT More by this Author

By the end of 2021, the pension industry’s total assets were Sh1.547 trillion, according to the statistics from the

Retirement Benefits Authority. The National Social Security Fund’s assets under management during the period was Sh240.36 billion. These pension funds are to a large extent managed by institutional investors, whether fund managers or asset managers.

Given the huge volume of funds under management by institutional investors, including pension funds and other funds, there is a critical need to ensure that these funds are managed responsibly and sustainably.

Since the enactment of the Stewardship Code for Institutional Investors in 2017, there has been commendable progress on its implementation in the market. There is now more understanding by institutional investors on their stewardship responsibilities, coupled with the appreciation of their fiduciary duties to clients.

Prior to the enactment of the Stewardship Code, there was no structured framework or guidance to institutional investors to enable them to discharge their responsibilities. Each institutional investor had its own understanding of its stewardship role and responsibilities, giving rise to contradictory, inconsistent and often conflicting expectations.

The Stewardship Code sought to provide a structured, coherent, and comprehensive approach to stewardship responsibilities so as to enable institutional investors make informed decisions for the success and sustainability of the capital market and the financial sector generally.

Since 2017, the Capital Markets Authority (CMA) has continued to engage all relevant stakeholders to enhance awareness of the Stewardship Code and promote its adoption by institutional investors, especially asset owners and managers. The CMA continues to call on institutional investors to become signatories to the Code and apply its principles.

In 2021, the CMA signed a memorandum of understanding with the Institute of Certified Secretaries (ICS), the Fund Managers Association (FMA) and the Association of Retirement Benefits Schemes (ARBS). The MoU seeks to establish a structured and coordinated framework for partnership and collaboration between the CMA and these institutions in the promotion of stewardship and good governance.

The authority has had several engagements with ICS, FMA and ARBS in line with the commitments made in the MoUs.

This new award category will assess the extent to which institutional investors have applied the principles set out in the Stewardship Code. The principles in the Code include responsible investment policies, monitoring of investee companies, active and informed voting practices, engagement and collaboration, management of conflicts of interest, focus on sustainability and ESG issues and public disclosures and client reporting. Each participating organisation will be assessed on the extent to which it has integrated these policies.

Some of the benefits of participation include submission to independent assessment on identified parameters of governance, customised governance assessment reports presented to each participant, and recognition of institutional investors demonstrating best practice in their stewardship role.

The assessments will be conducted by competent and experienced governance experts who will add value to each participating organisation.

Ultimately, it is investors that stand to benefit from this rigorous assessment process as their funds become better and more sustainably managed.

The writer is a senior governance oversight officer at the Capital Markets Authority.