According to multi-asset managers, a failure to get governance right is a threat to companies and indeed the success of multi-asset portfolios.
They say governance considerations are vital as a component of environmental, social and governance investing.
Governance has been an overarching principle of investing for many years.
In recent times, “both investors and advisers have experienced the repercussions when these standards slip” says Tim Morris, IFA at Russell & Co Financial Advisers.
“This can be with regards to mainstream funds, such as Woodford Patient Capital or, more recently, cryptocurrency providers", he adds.
Because of such financial catastrophes, Morris advises: “it is paramount that multi-asset managers conduct extensive and robust due diligence” to protect against the risks caused by poor governance.
Risk management
But it is also important to do focused research.
According to Alena Kosava, head of investment research at AJ Bell, “ESG is a broad term, with a plethora of views on the subject and breadth of implementation across multi-asset portfolios.
She says that one way to consider ESG is “through a risk-management lens”, as it has also become a crucial component in considering a broad spectrum of outcomes and external impacts, shaping capital allocation decisions and serving in preservation and growth of capital over the long run”.
Governance is crucial to business success, although has to be pragmatic enough to offer balance.
Good governance, with its risk mitigation and risk management functions is key to this.
Kosava asserts: “It ensures adequate risk taking, risk management, capital allocation, manager continuation and remuneration policies, among other things.”
Despite Morris’s concerns about standards slipping, Kosava feels that the UK is “one of the leaders globally in regards to corporate governance” and “sets a leading example”.
However, she goes on to describe a “number of instances more recently, where having too stringent a code is weighing on companies’ willingness to consider a listing in the UK.
"As an example, too much regulation and relatively low executive remuneration (compared to the US, for instance), is weighing on the UK’s ability to attract IPOs.
"There’s been a lot of talk latterly around the subject, with likely changes necessary to retain UK’s standing as a leading global financial hub."
According to Kosava, the moral of the story is that governance is crucial to business success, although has to be pragmatic enough to offer balance.
Relevance
Rahab Paracha is sustainable multi-asset investment specialist at Rathbone Greenbank multi-asset portfolios.
