Industry

Four-fifths of UK Asset Owners Meet New Stewardship Criteria

Third of total applicants fail to satisfy Financial Reporting Council’s stricter ESG-based standards.

The Financial Reporting Council (FRC) has today published a list of successful signatories to the updated UK Stewardship Code, including 23 out of the 28 UK asset owner applicants. Aviva Life and Pensions, Nest and RPMI Railpen are all successful signatories, but the FRC has declined to name unsuccessful applicants.

The successful 125 asset managers, asset owners and service providers (largely investment consultants) represent £20 trillion in assets under management.

“We’re delighted to be recognised as signatories to the FRC’s new UK Stewardship Code. At Nest, we have been integrating ESG factors into our investment approach and undertaking stewardship right from the beginning, from manager selection to engaging directly with the companies we invest in,” said Diandra Soobiah, Nest’s Head of Responsible Investment.

Asset management and investment consultancy firm Mercer was also listed.

“We will continue to support our asset owner clients in raising stewardship standards and to embed further strong stewardship expectations across both our manager research and our investment solutions,” said Sylvia Pozezanac, President and CEO of Mercer UK.

Integrating stewardship 

Quality of stewardship has become increasingly important in the investment industry as asset owners and managers seek to exercise greater scrutiny over the sustainability performance of investee firms due to greater awareness of the materiality of ESG risks.

The updated Stewardship Code came into effect from 1 January, 2020, and reflects the increasing importance of ESG factors for investors. In order to become a signatory, applicants needed to submit a stewardship report explaining how they applied all the Code’s principles within a one-year period.

The Code comprises of 12 principles for investment institutions and six for service providers, including how they have selected and prioritised engagement and how signatories have engaged with issuers to maintain or enhance the value of assets.

“The FRC was pleased to see investors better integrating stewardship and ESG factors into their investment decision-making, reporting on asset classes other than listed equity and identifying the outcomes of their efforts. There was also some strong reporting on underpinning governance activities,” the auditing and corporate governance watchdog said.

With only 28 asset owners filing in time for the first application window, ESG Investor understands that others, such as the Co-op Group pension schemes, have chosen to file their reports during the 31 October application window or by 30 April, 2022, in order to align with the production of their annual reports. Unsuccessful applicants may also reapply.

Areas of weakness

A third of asset managers, asset owners and service providers did not make the cut because they did not successfully address the code’s principles or comprehensively evidence their approach, the FRC said.

“Other areas of weakness included reporting on the approaches to review and assurance, and monitoring service providers,” the body added.

Some of the world’s biggest and most well-known asset managers, such as Schroders and State Street Global Advisors, were absent from the list.

Schroders, which has previously been a signatory for over a decade, said it was not successful due to the formatting of its submission rather than the substance.

“We are frustrated not to be a signatory,” a Schroders spokesperson said. “We believe strongly in the power of stewardship and constructive engagement with business. We are confident we will be a signatory again soon.”

All applicants were provided with individual feedback “indicating where their report has met our expectations, and which areas are in need of improvement”, an FRC spokesperson said. “We encourage all applicants to address these areas.”

In September 2020, the FRC published a progress report assessing 25 ‘early’ reports to the Code. In its feedback at the time, the FRC noted that reporting needed to better reflect the effectiveness of approach with evidence.

Once included as a signatory, from 2022 onwards, all organisations will have the option to submit their annual Stewardship Code reports on 30 April or 31 October of each year, depending on which deadline works best according with their respective reporting cycles.

In November, the body will publish a review of the reports submitted in spring 2021, providing examples of effective reporting, the FRC spokesperson added. It will further “identify where [the FRC] will expect reporting to improve in 2022”.

“The publication of this list delivers on the recommendations of The Kingman Review in respect of stewardship and demonstrates our continued commitment to serve the public interest as we transform to becoming a new regulator,” said Sir Jon Thompson, FRC CEO.

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