Stepping up for sustainability and stewardship

The Asset Management Taskforce (Taskforce) has published 20 recommendations aimed at increasing stewardship activities and ensuring that they are focused on delivering long-term, sustainable benefits for investors, the economy, the environment and society (Investing with purpose: placing stewardship at the heart of sustainable growth).

The recommendations are under three pillars which support stewardship throughout the investment chain:

Pillar 1: stewardship behaviours - practical steps for strengthening how stewardship works across the full range of investments.

Pillar 2: stewardship for clients and savers - delivering on the purpose of the industry to generate sustainable value and achieve clients' investment goals.

Pillar 3: economy wide approach to stewardship - ensuring the collective responsibility of market participants and stakeholders.

What's our view?

The individual recommendations are well in line with the direction of travel for stewardship activities. Unlike the Shareholder Rights Directive II (which applied to listed equities), the UK Stewardship Code applies to all asset investment classes and this report encourages a greater use of stewardship across all investment securities, particularly debt, and in private markets. The recommendations, taken as a whole, represent another step change in stewardship.

Why did the Taskforce's report?

The Taskforce was established in October 2017 to encourage greater dialogue between the government, the industry and the FCA to ensure the UK investment industry continues to deliver for consumers and the wider economy. The Taskforce is chaired by the Economic Secretary to the Treasury and comprises CEOs from a diverse cross-section of the investment management industry, senior representatives of investor groups and the FCA.

They were tasked with putting together a set of recommendations to promote and facilitate the highest standards of stewardship in the United Kingdom whilst strengthening the UK's reputation as a global centre of excellence.

"Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society"
(FRC, UK Stewardship Code 2020)

What are the key recommendations for asset managers/asset owners?

These include:

• A step change: a call for 'a step change in the industry's approach to the culture, governance and incentivisation of stewardship.'

• UK Stewardship Code: greater efforts to made by asset owners and asset managers to become signatories to the UK Stewardship Code and for asset owners to redouble their efforts as stewards.

• All asset classes: stewardship should not be limited to listed equities but should be across the full range of investment securities, particularly debt, and bondholders should make full use of their rights.

• Private assets: more emphasis is needed on stewardship in private markets. Asset owners and investment managers should identify common criteria for best practice stewardship in private asset classes.

• Shareholder resolutions: shareholders should use requisitioned resolutions more proactively and develop model resolutions to escalate a range of critical concerns with investee companies, including on climate change. 

• Comply or explain: companies, asset managers and their advisors need to take responsibility for reinforcing the Corporate Governance Code's 'comply or explain' regime and ensuring that the quality of explanations improve. Investors should set out their support for the 'comply or explain' regime and reinforce this with their engagement and voting approach. Investors should set out the attributes of a high-quality explanation.

• Sustainability reporting: regulators and investors should continue to support ongoing international efforts to enhance and harmonise corporate reporting standards for sustainability. The UK asset management industry supports the early adoption of Taskforce for Climate Related Financial Disclosures (TCFD) by investee companies and the use of other reporting standards, such as the SASB metrics, as a stepping-stone until an international reporting standard is developed.

• Investment mandates: an endorsement of the IA's and PLSA's commitment to establish a new steering group to explore 'how to embed a focus on long-term factors including stewardship' in the relationship between asset owners and investment managers, as their relationship 'sets the tone for sustainable value creation and aligning incentives right across the investment chain'.

• Pensions: UK pension schemes should be required to explain how their stewardship policies and activities are in members' best interests and recommend the establishment of a dedicated council of UK pension schemes (both public and private) to promote and facilitate high standards of stewardship of pension assets.

• Service providers: all service providers in the stewardship investment chain (including proxy advisors, index providers, data providers and credit rating agencies) should demonstrate how they support effective stewardship. They are encouraged to do so through becoming signatories to the service provider principles of the UK Stewardship Code.

What are the key recommendations for companies?

These include:

• Key drivers: the need to facilitate engagement with investors at the executive team and board level, including providing information about the key drivers of long-term risk and value creation, so that investors can effectively incorporate these drivers into their investment process and support companies to address them in their engagement.

• Access to capital markets: companies that are seeking additional capital, either through new equity or bonds, need to demonstrate how they are transitioning their business model to a more sustainable footing.

• Large private companies: the government should legislate to require all large UK companies (both public and private) to make TCFD disclosures, recognising the significant contribution that large private companies will make to the net zero carbon transition. Companies should also have regard to industry endorsed disclosure frameworks and investors should reinforce this expectation through their stewardship activity.

• Large private companies are also encouraged to improve their disclosures against the Wates Principles and the section 172 Companies Act 2006 reporting requirements.

• Directors' engagement/understanding: all board directors to become better engaged in the stewardship process. The Financial Reporting Council should develop tools and resources to support directors to understand better investors' evolving approach to stewardship and the UK Stewardship Code.

What does the Taskforce's report conclude?

The report concludes that "While the UK is considered world leading in stewardship and corporate governance, there is no room for complacency. The investment industry and society as a whole need to navigate the challenges of the next decade and beyond to continue to deliver sustainable value for savers. Climate change and post-Covid economic recovery will be key tests for the blueprint set out in this report. The role of the UK's investment industry post-Brexit is another challenge that investors must embrace to ensure that the UK maintains its world leading position in stewardship and responsible investment."