The recent revamp of The Financial Reporting Council’s (FRC) UK Stewardship Code, which imposes tougher reporting requirements on professional investors, represents a milestone in asset management.
The latest Code, released in September, set high standards of stewardship for those investing money on behalf of UK savers and pensioners. Applicants that were successful better demonstrated their commitment to stewardship and investing for a sustainable future.
The key word here is ‘demonstrated’.
The concept of stewardship has become increasingly prominent in recent years on the back of demand for sustainable investment products and a growing focus on the environmental and social impact of companies.
The FRC has stated “the organisations that did not make the list commonly did not address all the Principles or sufficiently evidence their approach, instead relying too heavily on policy statements”. This shouldn’t come as too much of a surprise given greenwashing has become its own epidemic in asset management and has, quite rightly, attracted a lot of press attention of late.
Thankfully, the Stewardship Code doesn’t stop at a single assessment, so those included in the list can’t simply bandy the accolade around for the next decade indiscriminately. To remain signatories, the FRC has said organisations need to continue to improve their reporting as market practice and expectations evolve. This is holding organisations to account, which is key if the industry is to take the matter of stewardship seriously.
Some (not least those omitted from the list of signatories) might seek to play this down, but we are pleased and proud to increase transparency in our commitment to stewardship and sustainability. Commitment to responsible investment in the allocation and management of capital should be a given. Assessing and monitoring companies over a long time horizon, with the best interests of clients at the heart of investment decisions, really shouldn’t be something that’s difficult to demonstrate in asset management. Surely this forms part of the core purpose of the industry and should be a given.
An important element of stewardship and keeping abreast of ESG matters is active engagement with existing or potential investee companies. This should be central to investment due diligence, with the purpose of safeguarding and increasing value for clients.
The importance of sustainability has never been more prominent. While we have always considered that investing in companies with sustainable business practices, run by people with integrity is central to our approach, it does make me question why it is that so many others haven’t been able to or simply cannot demonstrate this.
Not wishing to toot our own horn too loudly and merely by way of example, the concept of stewardship has always played a key role in our Tenax Absolute Return Strategies Fund since inception. The multi-asset strategy was developed in 2007 for a single private client based on their income and growth requirements and attitude to risk. To this day they remain an investor, and investment decisions are still made in line with the original objective and investment philosophy in mind.
The point is, it serves as a rather effective focus when individual investor outcomes (rather than performance tables) are at the very core of the fund managers’ decision-making process. If holding yourselves to account isn’t demonstrating stewardship at its most authentic, I don’t know what is.
On a brighter note, the FRC was pleased to see many investors better integrating stewardship, and environmental, social and governance (ESG) factors into their decision-making, reporting on asset classes other than listed equity and identifying the outcomes of their efforts. There was also some strong reporting on governance activities.
Ultimately, the signatories included in the FRC list, of which 90 are defined as asset managers, represented £20 trillion of assets under management. In the grand scheme of things, that doesn’t seem a lot but I have a strong feeling this number will grow – either as more organisations are added to the list of signatories or, dare I say it, via a changing tide of asset flows into the hands of those organisations able to demonstrate the good practices that got them on the list in the first place.
The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.
Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.