Effective stewardship reporting in 2022

The FRC recently published its review of reporting against the Stewardship Code (Code) in 2021 and set out its expectations for 2022 (Effective Stewardship Reporting: Examples from 2021 and expectations for 2022) (the Report). Here we summarise the key points from the report to assist you in putting together your report for 2022.

The summary is divided into the same five parts as the Report for ease of reference. The Report also includes case studies highlighting good practice in particular reporting areas. We would highly recommend that anyone responsible for putting together their organisation's stewardship report refers to the Report.

Key takeaways from the Report are:

• reports should be clear, succinct, written in plain English and understandable to a wide audience

• practical examples and case studies should be used to show how stewardship policies have been applied in the reporting year

• reports should be representative across asset classes and geographies and balance the use of quantitative and qualitative information

• reports should include the actions undertaken on behalf of applicants (by service providers, asset managers, etc) and explain how these actions have been monitored

• reports should be fair and balanced, provide examples of any setbacks and improvements to be put in place in the future.

Expectations of reporting

• Read the code - applicants should follow the guidance given in the "How to Report" section of the Code. Each Principle of the Code is supported by reporting expectations which indicate the information which should be disclosed. Stewardship activities and outcomes from the year should be included, not just policies.

• Submit a single report - one single PDF or word document must be submitted. The structure should be clear and the report should be understandable to a wide audience. Links can be included to detailed policies and information but the key features should be summarised within the report itself. There are effective examples of both reporting on a Principle by Principle basis and alignment of an organisation's own active ownership or sustainable investment report with the Code

• Respond to all Principles and reporting expectations - Reports need to 'apply and explain' all the Principles and organisations must respond to all reporting expectations which they determine are relevant to their business. Where reporting expectations are not applicable this should be acknowledged and explained rather than left out. Cross referencing to different sections of the report is encouraged.

• Provide evidence and explanation - statements about policies should be accompanied by examples of how the policies were applied, providing relevant data and case studies. Boilerplate statements should be avoided. On the rare occasions that there are (justifiably) no examples, this should be explained. The FRC expects a balance of qualitative and quantitative reporting with data, diagrams and tables well-presented and clearly labelled.

• Reports should be fair, balanced and understandable - levels of participation and engagement should not be overstated. Setbacks should be identified as well as successes. Where activities have been started but not completed within the reporting period, this should be indicated and progress reported in future reports. Reporting should cover all asset classes and geographies with any difference in approach clearly identified. Reports should explain how an organisation ensures a report is fair, balanced and understandable (rather than just a statement to say it is fair and balanced).

• Focus on continuous improvement - reports should include reflection on how well an organisation is set up to support effective stewardship and these reflections should be included year on year. Reports should include any planned improvements, with progress on these improvements included in future reports.

Market-wide and Systemic Risks and Collaboration - Features of effective reporting for Principle 4 (promoting well-functioning markets)

• Reports should explain the processes that applicants follow to monitor the macroeconomic environment as well as identify market wide and systemic risks.

• Applicants should also explain their governance processes for monitoring risk, for example through groups or committees or a process for escalation.

• Applicants should explain how their investments are aligned with the identified risks (it is noted this was generally done well by signatories and with good cross referencing).

• Applicants should explain how they have worked with others to address market wide and systemic risk, for example participation in regulatory workshops, responses to government consultations or contribution to research.  Where applicants have participated in industry initiatives, the extent of their contribution should be explained (it is recognised that the relative size of an organisation may impact what an appropriate contribution is). If agents are used, reports should explain how they are held to account.

• Reports should explain any participation in collaborative engagement. Collaborative engagement may be at industry level targeting a group of companies on a stewardship issue or engaging with a single issuer on a specific objective.

• Better reports cross referenced issues identified under other Principles, for example, where ESG issues are identified under Principle 7 (Stewardship, investment and ESG integration) are market wide and systemic, these may be relevant for Principle 4 (e.g. climate change, COVID-19 pandemic). Principle 10 (which states that signatories, where necessary, should participate in collaborative engagement to influence issuers) disclosures may also be relevant for Principle 4. The FRC does not require disclosures to be repeated but does encourage effective cross referencing.

• The Report states that one of the weaker disclosures in the reports assessed in 2021 was the assessment of effectiveness identifying and responding to market wide and systemic risks. Signatories should consider the effectiveness of internal process in identifying risks as well as their impact on the market in responding to the risks. Even if responses to risks have not been successful (or are difficult to measure), these efforts and outcomes should still be reported and reports should consider how an organisation might change its approach in the future.

Reporting on Asset Classes other than Listed Equity

• Reporting on asset classes other than listed equity was mixed across the reports in 2021 with most covering non-listed equity classes less extensively.

• The FRC recognises that organisations are still developing their stewardship practice in asset classes other than listed equity. Applicants should be transparent, identify any limitations and explain what they are doing to address these.

• Better reports provided detail on how assets were distributed with a geographical and asset class breakdown. The better reports also used diagrams to present AUM disclosures. But diagrams need to be clearly titled and labelled, and legible.

• Signatories should explain how the integration of stewardship and investment differs across different asset classes and geographies. Better reporting should explain the approach and rationale for any differences.

• Better reports provided a comparison of the approaches across asset classes with explanations and studies for individual asset classes.

• Better reporting emphasised how stewardship and investment (including ESG issues) are integrated and reflected in the investment decision making process (and provided illustrative examples).

• Real estate and infrastructure is highlighted as an asset class where reporting requires significant improvement.

• Reporting on Principle 11 (Escalation) was weaker in comparison with other Principles. Reports should explain how they selected and prioritised issues for escalation, including the factors considered most important in the decision to escalate and choosing the escalation approach. Reports should also better explain the expectations set for those that escalate stewardship activities on behalf of an organisation. They should also describe the outcomes of escalation.

• Pages 36-40 of the Report suggest stewardship activities that signatories could report on across the different asset classes (other than listed equity). These will be a useful point of reference for organisations in reviewing their stewardship activities.

Focus on Outcome Reporting

• Reporting on outcomes requires a reflection on how effective an organisation has been in achieving their aims. It must be backed up with evidence and any shortcomings should be acknowledged.

• Many organisations failed to report outcomes of activities across all Principles and therefore did not achieve the standard expected by the Code.

• Where Principles require reporting on internal policies and activities, applicants must review the effectiveness of their operational activities in relation to stewardship and support it with evidence. A range of evidence (internal metrics, internal reviews, client reviews and feedback) leads to a more comprehensive disclosure. Applicants should consider the credibility of any external awards or accolades before including them.

• Reporting for Principle 2 (governance and resourcing of stewardship) and Principle 5 (review and assurance measures) is connected. Organisations should note any changes they have made following review. If no changes have been made, applicants should report on why they did not consider changes necessary. As noted previously, cross referencing disclosures is acceptable as long as the specific reporting expectations for each Principle are met.

• Reporting on Principle 3 (identification and management of conflicts of interest) - applicants should describe how they have applied their conflicts policy, providing details on committees and staff evaluation of conflicts and mechanisms and processes to mitigate conflicts. The FRC expects organisations to report on specific examples. In the rare instances there have been no conflicts, reports should state this explicitly and provide a detailed explanation of the output of the conflicts policy.

• Reporting should include examples of how investors have considered feedback from clients and beneficiaries and incorporated it into policies and operations.

• Asset owners should explain (with examples) where asset managers have not followed their stewardship policies. If there are no examples in the reporting period, organisations should explain how the manager's activities are aligned with their policies/and or explain what they would do if such a situation were to arise. Better reporting presents examples as case studies.

• When reporting on Principle 7 (integration of material ESG issues into investment decisions), clear examples of how and when decisions were influenced is important. When describing relationships with service providers, investors should describe the clear direction they have given which could include service level agreements and how they monitor the performance of service providers.

• The Code asks for examples of voting in the reporting period. In disclosing voting activity, organisations should explain their rationale behind decisions. Asset managers may want to consider COBS 2.2B.7 (most significant votes) when deciding examples to include and asset owners may want to consider their Implementation Statement.

• Principal 12 specifically includes reporting expectations for listed equity, but the FRC expects investors in other asset classes to explain outcomes when exercising rights and responsibilities where possible.

• Where asset owners use asset managers, asset owners should explain how they communicate reporting needs to asset managers and include examples of the outcomes (e.g. with extracts from asset managers reports or case studies).

Guide to Effective Engagement Reporting

• Where applicants delegate some aspects of engagement, they should explain the expectations set for others and include case studies of the engagement carried out on their behalf (in additional to examples of their own monitoring work).

• Applicants should distinguish between monitoring and engagement. Monitoring includes general information gathering, whereas engagement examples should focus on specific issues or objectives raised to seek change.

• Reporting on engagement activity by providing a summary and key metrics of activity is useful for medium or large organisations. Better reporting explains the extent to which key metrics are used and provides representative examples with a range of case studies.

• Better reporting provides case studies of engagements with single companies as well as engagement on thematic issues. Effective case studies should also state the aims of engagement and how objectives may have changed if the engagement spans a longer time period.

• Organisations should demonstrate how their engagement differs across different asset classes and geographies, whether in narrative or by case studies. It is acceptable for smaller asset managers to provide fewer examples (as long as the examples given are representative).

• The Code is focused on reporting on stewardship activities and outcomes in a reporting year. Organisations therefore need to be specific about activities in that reporting year (even if case studies span a multi-year period).

• Organisations should explain why they have chosen a particular approach to engagement - whether within a case study or in a separate paragraph to a case study.

• Where reporting on collaborative engagements, it is important for an organisation to explain why it has chosen to engage collaboratively and the contribution it has made, rather than simply list collaborative initiatives without providing examples.

• Organisations should explain why and when they have chosen to escalate their engagement and give reasons for the approach taken. The outcomes of engagement should be clearly stated, both negative and positive ones. Where an engagement is ongoing better case studies provide information on future monitoring and any actions planned.