In an era of mounting geopolitical tensions, shifting regulatory landscapes, and intensifying climate risks, the role of institutional investors has never been more important – or more contested. With over $50 trillion in assets under management in the U.S. alone, institutional investors have the power to influence capital flows, governance, and market stability. Yet, how well do they shoulder the immense responsibility that comes with this power?

Today, the global investment landscape stands at a crossroads. In the U.S., a growing political and regulatory backlash against environmental, social, and governance (ESG) initiatives has triggered a “chilling effect,” prompting asset managers to tread cautiously on climate action. Meanwhile, across Europe, investors face mounting pressure to comply with stringent sustainability reporting requirements, even as industry-wide net-zero commitments become increasingly difficult to achieve.

In a new article, I offer a new perspective. I challenge the conventional view of institutional investors as mere financial agents acting on behalf of clients and beneficiaries and highlight their responsibilities to multiple stakeholders – including end investors, investee companies, and society as a whole.

The Missing “Others” in Stewardship

My research introduces a critical distinction:

• Clients/beneficiaries: those on whose behalf institutional investors act.
• The “unseen others”: those for whom their actions ultimately have consequences.

These groups do not always align. For instance, an asset manager’s immediate duty may be to maximize financial returns for its clients, but its investment choices – such as supporting unsustainable business practices – may have long-term societal repercussions that harm the people it aims to serve.

To address this misalignment, I propose a four-fold framework of investor stewardship:

1. Client Stewardship: Fulfilling fiduciary and contractual obligations to direct clients and beneficiaries.
2. End-Investor Stewardship: Recognizing and incorporating the interests of ultimate savers and pensioners, even in cases of delegated investment.
3. Asset Stewardship: Managing investments to ensure the long-term sustainability of the investee assets (e.g., companies in which shares are held).
4. Sustainability Stewardship: Aligning investment practices with broader social and environmental goals, beyond purely financial considerations.

These relationships exist within a flow of funds framework, where institutional investors sit at the intersection of capital allocation and economic impact. However, not all forms of stewardship are recognized by hard law. While client stewardship is legally binding through fiduciary duties, end-investor stewardship, asset stewardship, and sustainability stewardship are primarily governed by soft law frameworks, such as stewardship codes.

Figure: Enlightened Stewardship in Delegated Asset Management

This distinction raises an important question: To what extent should institutional investors engage with these broader responsibilities, and how should they navigate competing stewardship roles? For some, integrating sustainability considerations naturally aligns with their clients’ and beneficiaries’ long-term financial goals. However, stewardship does not necessarily drive societal benefits, as institutional investors’ primary obligation remains financially oriented.

The Case for “Crowding In”

A key challenge in advancing enlightened stewardship is the absence of clear regulatory expectations beyond fiduciary obligations to clients. My research suggests that stewardship codes and corporate governance frameworks can play a crucial role in “crowding in” broader stewardship responsibilities by setting clearer expectations for how institutional investors can approach the balance between financial performance and systemic and societal risks.

Currently, the UK Stewardship Code 2020 defines stewardship as “the responsible allocation, management, and oversight of capital to create long-term value for clients and beneficiaries, leading to sustainable benefits for theeconomy, the environment, and society.” However, this broad definition has led to different interpretations and inconsistent applications across the investment chain. Some view it as reinforcing the primacy of financial value, while others interpret it as prioritizing environmental and social objectives as ends in themselves rather than as means to long-term financial returns. This lack of clarity has resulted in “constructive ambiguity” about the primary purpose of stewardship, creating friction among investors, asset managers, and policymakers.

To balance competing interests and reduce this ambiguity, I propose integrating elements akin to Section 172 of the UK Companies Act 2006, which requires company directors to act in the long-term interests of the company, considering the effects of their decisions on employees, suppliers, and the environment.

Embedding a similar principle in stewardship codes (or broader investment policies) would provide:

1. Stronger guidance on balancing fiduciary duty with broader sustainability goals.
2. Greater accountability and transparency on stewardship decisions.
3. A framework for resolving conflicts between short-term financial interests and long-term systemic risks (e.g., climate risk, social inequality, corporate governance failures).

This approach could also help inform the U.S. debate on investor responsibility. While SEC regulations increasingly emphasize transparency in proxy voting and ESG disclosures, there remains a deep divide over whether institutional investors should actively engage in sustainability issues. Critics in the U.S. argue that stewardship should remain purely financially focused, while proponents see a role for investors in mitigating systemic risks that could affect long-term financial performance. By clarifying the broader responsibilities of institutional investors, both UK and U.S. policymakers could create a framework where stewardship enhances long-term value without overstepping legal boundaries.

Why This Matters Now

Institutional investors cannot afford to take a passive approach in today’s economic, social, and environmental landscape. With trillions of dollars in capital shaping corporate behavior and economic stability, the role of investors goes beyond just financial returns.

• In the U.S., we are seeing an increasing political divide over ESG, investor stewardship, and shareholder activism.
• In the UK and EU, there is growing momentum behind sustainable finance, but investor stewardship remains fragmented and lacks enforcement mechanisms.
• The climate crisis, social inequality, and volatile markets require investors to rethink their long-term responsibilities.

Looking Ahead

With the UK Stewardship Code revision approaching and global debates on corporate purpose and responsible investment gaining traction, now is the time to rethink stewardship frameworks that balance financial returns, systemic risks, and societal well-being. Investor stewardship cannot be reduced to a checklist – it must evolve into a dynamic and accountable practice that reflects the realities of today’s economic and geopolitical environment.

This post comes to us from Dionysia Katelouzou, a reader (associate professor) in corporate law and corporate governance at The Dickson Poon School of Law, King’s College London. It is based on her recent article, “The Unseen ‘Others’: A Framework for Investor Stewardship,” available here.