Why Financial Markets Must Embrace Macro-Stewardship and Policy Engagement to Tackle Systemic Risks

As the financial world grapples with escalating systemic threats—ranging from climate change and biodiversity loss to the rapid rise of artificial intelligence—a growing consensus has emerged regarding the boundaries of investor responsibility. Addressing these existential challenges is no longer viewed merely as a moral or ethical choice, but as a core fiduciary duty for long-term investors. However, as the finance sector confronts market failures that current economic structures cannot fix on their own, experts argue that sustainable investing must evolve beyond traditional company dialogues to encompass active policy engagement.

In a recent episode of the Responsible Investor podcast, host Lucy Fitzgeorge-Parker sat down with Steve Waygood, founder of the Finance Transition Centre and former chief sustainable finance officer at Aviva Investors, to examine the complex realities of policy advocacy. Having spent nearly two decades leading Aviva’s responsible investment business, Waygood offered deep insights into how institutional investors can effectively bridge the gap between financial markets and government policymaking.

The Fiduciary Imperative for Systemic Risk Management

The conversation opened with a foundational premise: systemic risks like climate change, nature loss, and AI governance are fundamentally reshaping market stability. According to Waygood, engaging with policymakers is not an optional extra; it is a sensible fiduciary defense mechanism. Without policy intervention, executives and non-executive directors face mounting legal and regulatory risks as current market structures continue to fail to reward long-term, sustainable growth.

"There can be no question that the current structure of markets is not supporting their long-term growth, and therefore, it is the role of governments to change that," Waygood noted, adding antimicrobial resistance to the list of systemic market failures alongside AI and climate change.

While asset owners hold

ultimate accountability due to their clear mandates and lack of conflicts of interest, Waygood emphasized that policy engagement cannot sit in a silo. It must be holistically embedded directly into the investment process, aligning quantitative valuation models with the macroeconomic realities shaped by government regulation.

Lessons from Aviva Investors: Grounding Policy in Practice

During his tenure at Aviva Investors, the firm earned a rare reputation as a pioneer and success story in active policy engagement. Reflecting on how this capability was built, Waygood stressed that successful policy work must be inextricably linked to mainstream asset valuation and portfolio management. If an issue is deemed critical to long-term returns but remains externalized by the market, it falls on governments to correct the market failure—and on investors to help policymakers understand the practical mechanisms required to do so.

This approach yielded notable historical achievements. Waygood highlighted Aviva’s role in helping create the EU High-Level Expert Group on Sustainable Finance, contributing to the Task Force on Climate-related Financial Disclosures (TCFD), and co-founding the World Benchmarking Alliance. The latter was launched following a call to action by Aviva’s chief executive at the 2015 UN General Assembly, backed by a multimillion-pound initial donation.

Externally, Waygood observed that civil servants often lack direct visibility into the granular mechanics of financial markets. Consequently, effective policy engagement is rarely a one-way street of corporate lobbying. Instead, it operates as a sophisticated dialogue where regulators test ideas and seek market intelligence on how regulatory changes will alter cash flows, corporate valuations, and capital allocation.

Overcoming the Free-Rider Problem and Resistance

Despite the successes of market leaders like Aviva, the broader investment industry remains hamstrung by a classic economic free-rider problem. The vast majority of asset managers continue to benefit from the policy advocacy and stewardship work of a small minority without committing proportional resources or capital of their own.

This dynamic is further complicated by shifting geopolitical headwinds. Across the Atlantic, polarized political environments and changing administrations—particularly in the United States—have subjected sustainable finance frameworks to intense scrutiny. Waygood pointed out that institutional strategies must look beyond short-term political noise and prepare for inevitable cyclical shifts, keeping sights fixed on the structural integrity of global markets over multi-year horizons.

Furthermore, asset managers frequently face conflicting demands from clients with divergent priorities. To navigate these tensions without exposing themselves to severe political pushback, Waygood argued that industry trade associations and collaborative platforms—such as the Institutional Investors Group on Climate Change (IIGCC) and the Principles for Responsible Investment (PRI)—must play a central role. By leveraging collective bodies, institutions can advocate for necessary regulatory frameworks while insulating individual firms from targeted pressure.

Redefining Lobbying and Scaling Up the Ecosystem

A critical distinction drawn during the discussion was the semantic and operational divide between traditional corporate lobbying and systemic policy engagement. Waygood contended that private, opaque lobbying driven by short-term corporate interests must give way to transparent, public-interest advocacy. He advocates for a future where corporate transition plans explicitly outline the government policies, standards, and carbon pricing mechanisms required to make sustainable practices economically viable.

Achieving this transition across the entire financial ecosystem requires mobilizing not just asset owners and managers, but investment consultants, stock exchanges, credit rating agencies, and investment banks. While dedicated public policy teams and external specialists can enhance an institution’s advocacy capabilities, smaller asset owners can still make meaningful contributions by participating in collaborative consultation responses through industry networks.

Addressing the perennial question of funding, Waygood challenged the notion that policy engagement necessarily requires hiking management fees for asset owners. Instead, he suggested that the industry needs a more rational reallocation of existing transaction costs and a critical audit of expensive, underutilized third-party ESG data that fails to drive actual investment decisions.

As the financial sector looks toward upcoming international forums and global climate summits, the imperative for coordinated macro-stewardship remains acute. Whether addressing climate adaptation, biodiversity, or emerging technological disruptions, the overarching message from industry veterans is clear: without active investor engagement to secure the policy foundations of sustainable growth, long-term financial stability remains profoundly vulnerable.