In a world where financial institutions are increasingly expected to go beyond short-term profits, the Stewardship Code has emerged as a powerful framework to promote responsible and transparent investment practices. At its core, the Stewardship Code is a voluntary set of principles that encourages long-term value creation, accountability, and sustainable governance through thoughtful investor engagement.
What is a Stewardship Code?
The Stewardship Code guides institutional investors—such as mutual funds, alternative investment funds (AIFs), and fund managers—on how to exercise ownership rights responsibly. It outlines how investors should monitor and engage with the companies they invest in, manage conflicts of interest, vote on corporate matters, collaborate with others, and disclose stewardship activities.
Adopting a stewardship code ensures that investment decisions are not only financially sound but also socially and environmentally responsible. The International Financial Services Centres Authority (IFSCA) is now encouraging fund management entities and institutional investors in the IFSC to adopt such a code.
Key Principles of a Stewardship Code
- Stewardship Policy Formulation and Disclosure
A regulated entity must develop a clear stewardship policy, reflecting its investment philosophies, governance culture, and decision-making frameworks. This policy should be publicly available, regularly reviewed, and transparent about the results achieved. Training for employees is crucial to ensure proper implementation.
- Monitoring Investee Companies
Effective stewardship goes beyond voting. It includes continuous monitoring of investee companies’ performance, strategy, ESG risks, and governance standards. Investors are expected to engage through letters, meetings, or other communication channels, ensuring that their concerns are heard—without breaching confidentiality or insider trading norms.
- Intervention and Escalation
When monitoring uncovers significant concerns—such as underperformance, governance lapses, or ESG failures—investors must be prepared to intervene or escalate. The policy should outline a structured intervention framework with documentation of all actions and responses received. This promotes transparency and proactive ownership.
- Managing Conflicts of Interest
Investors must act in the best interests of their clients or beneficiaries. A well-defined conflict-of-interest policy is essential to identify, mitigate, and disclose potential conflicts, especially during engagements or voting processes. Regular reviews ensure its continued relevance and effectiveness.
- Voting Responsibilities
Voting is a fundamental aspect of investor influence. Entities must establish a robust voting policy to ensure that votes reflect their long-term objectives and governance values. This includes maintaining voting records, using proxy advisors judiciously, and having an escalation matrix for complex or high-impact resolutions.
- Collaborative Engagement
Sometimes, collaboration with other investors can be more impactful than acting alone. The Stewardship Code encourages constructive and lawful collaboration to address issues of mutual concern, amplify investor voice, and promote stronger corporate governance.
- Disclosure and Reporting
Transparency is vital. Investors should periodically disclose their stewardship activities in a simple, accessible format. Any deviations from the policy must be explained. Feedback from stakeholders should also be welcomed and incorporated into the policy when necessary.
IFSCA’s Role and Recommendations
IFSCA recommends that regulated entities in the IFSC adopt a Stewardship Code issued by either:
Their home jurisdiction regulator,
Indian regulators like SEBI, IRDAI, or PFRDA,
Professional bodies like ICSI.
The adopted code must align with the principles outlined by IFSCA and be disclosed to the Authority and customers through the entity’s website. Regular reporting and internal policy reviews are mandatory to ensure compliance and ongoing relevance.