The UK’s Financial Reporting Council (FRC) consultation on a new stewardship code mostly hits the right notes, according to institutional investor organization the Investor Forum.
Andy Griffiths, executive director at the Investor Forum, tells IR Magazine: ‘The proposed revision of the code is very much welcomed given both the appetite among asset owners and the increasing focus of asset managers on stewardship activities. Importantly, our members choose to be leaders in this debate because they recognize the power and positive impact of stewardship rather than because they are compelled by any regulation.’
Griffiths says the Investor Forum’s focus has always been on the outcomes and effectiveness of stewardship. ‘Which is very much in line with the recommendation of the Kingman Review, rather than on policy statements,’ he points out. ‘We therefore look forward to working with our members to provide further tangible evidence of the positive impact of stewardship activity.’
Commenting on the first of the three specific headline recommendations of the code – ‘purpose, values and culture’ – Griffiths says: ‘We are supportive of the focus on creating a framework in which good stewardship behavior can thrive.
‘From the outset, the forum’s purpose has been to put stewardship at the heart of investment decision-making. To achieve this objective, it is crucial that the values and culture of the investment management firms encourage and reward such behavior. A clear codification of expectations is therefore important but, to increase confidence, the focus must shift to the impact of investor behavior.’
On the second part of the code – ‘recognizing the importance of ESG factors’ – Griffiths says it is not always easy to incorporate ESG perspectives when assessing the value of a company. ‘But we believe a holistic approach is crucial for investors to identify, create and sustain value over the long term. It is important that the code encourages an integrated, rather than a compliance-driven, methodology.
‘We are at the early stages of a fundamental change in the nature of the conversation between investors and companies on these issues. IR professionals will play a vital role in addressing the competing – and, in some cases, overwhelming – requests for insights and information to help better understand the impact of these factors.
‘It will become increasingly important for companies to take the lead in demonstrating their understanding of the materiality of these issues, and to communicate effectively with investors to inform the investment decision-making process.’
On the third part, ‘stewardship beyond listed equity’, Griffiths notes: ‘Our members are incorporating ESG and stewardship perspectives across all the asset classes in which they invest. To achieve the greatest impact, we believe investors should seek to engage with companies on an integrated basis, taking into account equity, credit and ESG perspectives.’
The forum held a fixed-income workshop in 2017 to discuss these issues and since then has sought to incorporate debt investor perspectives into its collective engagement activity.
‘We believe the stewardship and ESG teams are well placed to be the natural facilitators of multi-asset-class engagement activity, given their experience of working with different investment teams both within their organization and also collectively with other investors and organizations,’ Griffiths says.
When asked whether there is anything missing from the code that he would like to see covered or dealt with, Griffiths cites the long-standing principle of escalation (Principle 4), which appears to have been ‘de-emphasized’ in the new proposals.
‘We believe this is an important concept as there are typically several stages in the process of engagement, with different tools and approaches required as investor concerns are escalated,’ he explains. ‘We also note the move away from the reference to ‘act collectively with other investors’ – Principle 5 – to the use of collaboration in the FRC proposals. In parallel, the recent Financial Conduct Authority consultations refer to the concept of co-operation. As the architecture is reviewed, practitioners would benefit from a clarity and consistency of terminology.
‘The Investor Forum was created in response to the Kay Review recommendations to address the issue of the ownerless company through the ‘expression of a stronger collective voice’. We believe collective engagement through the Investor Forum is an effective tool to amplify investor concerns and would like to see the principles of both escalation and collective engagement actively encouraged.’
