Cracking the Code for effective stewardship

Friday lunchtime. Richmond Park. I was running but with phone in hand. Any minute now the FRC would email me, my CIO and CEO.

For security reasons, the FRC emailed a link. You click the link, log in, and a pdf letter would tell you whether your Stewardship Code application was successful. I was confident. But not that confident.

Richmond Park is the largest of London’s Royal Parks. It’s known for many things – its deer, its beetles – but not, it turns out, its phone reception, the link wouldn’t load.

Stewardship suffers from tragedies. Tragedy of the commons. Tragedy of the horizon. And now, it seems, tragedy of the ESG backlash.

Stewardship costs. If others engage, and we don’t, well, we benefit, but don’t pay. At the same time the benefits of stewardship are long-term, often beyond the term of the mandate.

For many asset owners, fee trumps stewardship and asset managers know it. Quality of stewardship is at best an ‘all things being equal test’ while fees are  front-and-centre. That’s why the Stewardship Code matters.

The Code assesses process, not sustainability. It is not the FRC’s remit to define sustainability. The EU Taxonomy or the UK FCA’s SDRs are better placed to do that.

Rather, it establishes a baseline for effective stewardship, good governance, dedicated resourcing, a focus on outcomes, collaboration, voting and the use of escalation.

The FRC’s Stewardship Code is world leading. Its staff are thoughtful, knowledgeable and responsive. For new applicants, the feedback is detailed and personal to the application.

It needs to stay that way. Far from being weakened because of ESG headwinds – the Code should be strengthened.

The FRC's five immediate changes to the Code announced in July included a clarification that reporting against Principles 10 and 11 is required only 'where necessary'.

This change is likely aimed at asset managers who struggle with some of the collaboration-related reporting requirements due to fear of breaching anti-trust laws.

From the perspective of the Code, it may signal a shift away from actions and activities that matter for effective stewardship. In research for my book, senior staff at the SEC dismissed this. Collaborative engagement, they told me, does not constitute acting in concert.

There is a risk that the wider market will now step away from collaborating and escalating and will be able to say it is 'not necessary' for their stewardship approach.

The Stewardship Code remains the industry gold standard with a perceived rigorous assessment process. It is an important differentiator for the market and helps to drive improvements in stewardship practice.

Yes, the FRC should address the reporting burden, perhaps a full annual submission is not necessary. Cross-referencing between the Principles for Responsible Investment (PRI) and between other disclosures (TCFD reporting for example) could help. Voluntary disclosures, such as the PRI’s, could be replaced (at least in part) by the FRC’s. The increasing length of Stewardship Code reports was not, as I understand it, ever the FRC’s intention.

But that can be alongside a focus on strengthening the Code. Changes to the contrary risk contributing to a 'race to the bottom', where applicants will adhere to minimum standards to pass, rather than driving improvement and innovation.

Critics of the Code say that its focus on outcomes is overreach. That, when it comes to stewardship, cause-and-effect is impossible to prove. Did Sainsbury’s increase staff pay, or Domino's establish a water policy, or BP establish a net zero target because of – or despite – investor engagement? We cannot know.

But that doesn’t negate a focus on outcomes, nor reporting on the processes followed to achieve those outcomes.

Well-resourced company engagement, systemic stewardship and policy engagement, collaboration with peers, policymakers and civil society, and escalation, including the use of voting and shareholder resolutions are foundational for effective stewardship.

The Code contributes to this, but we are far from reaching stewardship’s potential. This is the FRC’s opportunity, and arguably, its responsibility.

The link loaded, we were successful. The letter listed a number of areas for improvement, suggestions we took seriously. Because signatory status matters.