Stewardship and institutional investor engagement

3. Fiduciary duties of institutional investors

Institutional investors generally owe fiduciary duties to their clients on whose behalf they invest. Fiduciary duty refers to an institutional investor’s obligation to act in the clients’ best interests. Recognising differences across jurisdictions, this typically entails legal duties of care and loyalty in making investment decisions and overseeing portfolio assets. The duty of care requires institutional investors to act on a fully informed basis, in good faith, with due diligence and care. The duty of loyalty requires them to act solely in the best interests of clients, including through the identification and management of conflicts of interest.

The exercise of stewardship by institutional investors may be part of their fiduciary duty to clients. Through stewardship-related activities such as engagement and voting, institutional investors can help support the delivery of risk-adjusted returns from issuers consistent with institutional investors’ clients’ objectives and risk preferences. It is important to recognise that institutional investors may differ in their portfolio diversification, strategy, expertise, investment horizons and size, and therefore may adopt different approaches and levels of intensity in how they undertake stewardship.

3.1. The role of investment mandates and retail investor disclosure

Fiduciary duties are an essential part of the investor protection framework and become particularly salient as the degree of discretion afforded to an institutional investor increases. On the one hand, if the mandate between the asset owner and the asset manager establishes a specific obligation to the manager, the question of whether fiduciary duties have been fulfilled will often be straightforward. For example, if it is contractually established that the asset manager should exercise voting rights in all issuers, a failure to vote in certain cases primarily raises an issue of non-compliance with the mandate.

On the other hand, if the mandate is silent or ambiguous on key choices, the discussion about fiduciary duties will be more substantial. In such cases, asset managers should exercise judgement to determine which actions are expected to maximise risk-adjusted financial returns in a manner consistent with their clients’ objectives and risk preferences. In some jurisdictions, the consideration of sustainability-related risks and opportunities where these are financially material to investment outcomes may not be inconsistent with fiduciary duties, provided it is grounded in the pursuit of risk-adjusted financial returns consistent with clients’ objectives and risk preferences.

For institutional investors that delegate investment decisions to asset managers – either through segregated mandates or pooled funds – clear expectations for stewardship, engagement and the treatment of risks and opportunities may be important. In practice, courts and regulators rarely second‑guess day‑to‑day decisions absent serious misconduct, so accountability relies largely on robust mandate design, ongoing oversight and transparent disclosure. Asset owners may want to specify, at the mandate‑award stage, expectations on voting, engagement priorities, and conflict-of-interest management. Stewardship frameworks may support this by promoting regular monitoring against mandate provisions and by reporting on stewardship activities and outcomes.

Minimum levels of transparency and accountability may be useful for institutional investors with differing levels of sophistication and bargaining power. Larger or more sophisticated institutional investors may be able to negotiate more detailed reporting and oversight arrangements than smaller or less sophisticated institutional investors. Where assets are invested via pooled funds rather than managed on a segregated basis, information may ideally be made available to other fund investors, at least upon request, to encourage transparency across all investors in the fund.

3.2. Stewardship-related activities by pension funds and sovereign wealth funds

Institutional investors comprise a diverse range of entities, and these differences can influence how fiduciary duties apply in practice. While institutional investors as a group remain the largest category of investors globally – holding 47% of total equity of listed companies at the end of 2024 – the public sector also plays a significant role, accounting for 10% of total equity holdings (OECD, 2025[4]). Public-sector investors encompass governments acting as ultimate owners at national and sub-national levels, as well as public pension reserve funds (PPRFs) governed by public law and sovereign wealth funds (SWFs), whose mandates and legal frameworks may give rise to distinct fiduciary considerations.

PPRFs serve as reserves to support pay-as-you-go public pension systems. Their assets are earmarked for specific statutory purposes and managed under mandates set by law, often reflecting government objectives. Accordingly, PPRFs generally owe their fiduciary duty to the stability of the pension system rather than directly to individual beneficiaries, thereby indirectly protecting the interests of current and future beneficiaries. By contrast, in private pension funds, fiduciary duties are owed solely to members and beneficiaries.

While pension funds are generally required to maximise long-term risk-adjusted financial returns and manage asset-liability mismatch risks, some jurisdictions provide mandates or allowances for domestic investment. In some circumstances, pension funds may also be encouraged to engage with issuers to fulfil certain public policy or political objectives. In such cases, any departure from a primary focus on long-term risk-adjusted financial returns should ideally be well-considered, clearly defined, and consistent with trustees’ fiduciary duties.

SWFs are pools of assets owned and managed directly or indirectly by governments to achieve national objectives. They are typically financed by foreign exchange reserves, proceeds from the sale of natural resources such as oil, or general taxes and other revenues. SWFs often pursue multiple and sometimes overlapping goals, such as diversifying national assets, enhancing returns on reserves, saving for future generations, stabilising prices, supporting industrialisation, and advancing other strategic interests. SWFs typically take into account the long-term interests of the state as a steward of their assets.

Pension funds and SWFs share similarities, including their large size in some jurisdictions, but they may differ in how they discharge stewardship responsibilities. Pension funds are typically governed by fiduciary duties owed to beneficiaries, while SWFs may, in addition, be mandated to pursue broader objectives set by the state. Historically, stewardship was considered by pension funds only where it affected portfolio risks. However, stewardship has now become a central part of how pension funds manage listed equity investments – directly or indirectly – reflecting the view that it may enhance both value creation and risk management. Although traditionally focused on capital preservation and financial returns, some SWFs have incorporated environmental and social considerations and may exercise stewardship in public equity holdings in a manner similar to other institutional investors, subject to their mandates.