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Show don’t tell – UK Stewardship Code wants proof of actions

Show don’t tell – UK Stewardship Code wants proof of actions

13-11-2019 | インサイト

Investors will have to show the results of their active ownership work after the UK regulator updated its Stewardship Code. The Financial Reporting Council’s UK Stewardship Code 2020 shifts the focus from simply declaring a policy on voting and engagement to disclosing the outcomes of these actions. Robeco has been a Tier 1-rated signatory of the UK Stewardship Code since 2015. In this question and answer session, Governance Engagement Specialist Michiel van Esch and Active Ownership Analyst Cedric Hille explain how the 2020 revision changes the stewardship landscape in the UK and beyond.

  • Michiel  van Esch
    Michiel
    van Esch
    Specialist Governance and Active Ownership
  • Cedric Hille
    Cedric
    Hille
    Active ownership Analyst

Speed read

  • Update puts greater emphasis on results of active ownership
  • Increased accountability on implementation of stewardship
  • The Financial Reporting Council will carefully rate signatories

The UK Stewardship Code is widely regarded as one of the leading codes globally. How does the updated document change stewardship expectations in the market?

“The new code raises the bar and demands a higher level of accountability. Most stewardship codes ask for policies, processes and basic disclosures. The Financial Reporting Council (FRC) is now asking for more reporting on the implementation of these policies. It is shifting the focus from policy, to showing actions and outcomes.”

“For example, the FRC is not only expecting an investor to have a voting policy; it wants an explanation of what the investor has done to test if its voting behavior is in line with that policy, and the outcomes of any quality control testing on its stewardship work. The updated code now poses some challenging questions, such as ‘How do you measure the quality of your engagement program, your proxy voting, and your ESG integration? And where do you see room for improvement?’ That has changed the landscape.”

“The policy also asks for involvement from the highest governing bodies in investment organizations. ‘C-suite’ level executives and the board, for example, will be tasked with approving stewardship reports. At the same time, there is much more focus on the further organizational integration of stewardship, whether that takes place within internal audit and risk management departments, or within investment teams. Basically, the updated code asks investors to put their money where their mouth is, making it much stricter than other stewardship codes.”

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Do you see any risks coming from the provisions in this code?

“A potential downside that is common to all reporting-focused standards and codes is that they become merely a compliance exercise to meet the standards laid down. In the investment industry, reporting is sometimes viewed as a box-ticking exercise using boilerplate reporting texts, and the narrative doesn’t change much from year to year. The new code is much more specific on what needs to be made available in regular reporting. The FRC has provided good guidance on how to ensure reports are to the point and focus on outcomes, supported by examples. So this should combat any box-ticking culture that still remains.”

To what extent is self-reporting on ESG or stewardship a reliable source of information on the quality of investors’ practices?

“That is a good question – in many cases, investors tend to focus on what they are doing well, and not on potential weaknesses. ESG or stewardship reporting doesn’t yet enjoy the confidence and credibility of financial reporting, and that is partly because of a plurality of approaches and a lack of standard frameworks which limit the possibility of verifying and comparing the reports.”

“The FRC is doing a good job on moving the needle here. It has put quite a bit of effort into monitoring compliance with the code, and will judge carefully how the signatories to it perform. This approach should prevent some of the pitfalls and strengthen the substance of reporting.”

Is it helpful to have various national stewardship codes that all set their own expectations for voting and engagement?

“No, it is not. But the 2020 UK Stewardship Code has shifted the tone, and we think other codes should take a similar approach. The International Corporate Governance Network (ICGN) has written a set of Global Stewardship Principles, which we have also signed up to. That has been a helpful step towards a global standard, but it also still makes reference to national stewardship codes, so some fragmentation remains.”

The code prohibits the delegation of stewardship responsibilities. Is that realistic?

“In practice, this was already the case. Our interpretation is that while asset managers can still provide stewardship services for clients, these clients retain responsibility for these outcomes as well. The appointment of an active ownership service provider is delegating the activity, but not responsibility. That means asset owners must place high-quality expectations on their active ownership services. We appreciate engaged clients, and we know from experience that client involvement contributes to a strong stewardship offering.”

Is there anything in the code that you cannot comply with, or feel uncomfortable reporting?

“There are some potential downsides to reporting on specific examples of our engagement work. A high degree of confidentiality is often important in building a good relationship that leads to constructive engagement. Robeco reports all engagement work to our clients on a confidential basis for that reason.”

“Another common complaint by critics is that ESG and stewardship reporting is often only based on anecdotal evidence. There is much to be gained in striking a better balance of real and anecdotal evidence in this regard. This would also help our reports become more accessible to the public, and not just to industry practitioners.”

“Accountability should also go beyond the report. Our clients increasingly ask detailed questions on specific engagements, and how we determine our standpoint on proxy voting. Those conversations can be very helpful, as it challenges us to clarify our views and make our policies concrete. The upgraded code demands similar accountability to the public.”

What are the UK Stewardship Code’s greatest strengths?

“First and foremost, the required detail in reporting on implementation of stewardship policies is a major strength. As the sector moves from applauding good intentions in policies to demanding proof of outcomes, the code is a timely tailwind for this momentum.”

“It can also act as a constructive feedback loop. The code requires investors to evaluate their effectiveness in achieving their stewardship goals. We have to critically examine our processes and outcomes and ask: ‘Is this good enough?’ That makes the upgraded UK Stewardship Code uniquely dynamic, which could have far-reaching implications.”

重要事項

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