Making stewardship count
A joined-up approach to aligning stewardship objectives across the institutional investment community.
By Associate Professor Dr Anna Tilba
On 26 February 2020, the UK Financial Conduct Authority (FCA), the Financial Reporting Council (FRC), the Department for Work and Pensions (DWP) and The Pensions Regulator (TPR) held a joint industry workshop on investor stewardship. This workshop followed on from a year-long investment industry-wide consultation on how to build a better regulatory framework for effective stewardship to which I have contributed extensively. My involvement with this consultation is based on more than a decade of my academic research into institutional investors’ investment management practices in relation to stewardship, as well as my advisory roles at the UK Law Commission, Financial Conduct Authority, Competition and Markets Authority and The Pensions Regulator.
Institutional investor stewardship involves engaged and meaningful oversight of invested assets by asset owners and asset managers. According to the UK Stewardship Code (2020), stewardship activities are aimed at supporting the functioning of the UK’s financial markets by improving their quality and integrity as well as contributing to the sustainable long-term value creation for beneficiaries. It is expected that in the long term, effective stewardship will have a wider economic, societal, governance and environmental benefit.
UK asset management is a key part of the UK financial system with over £6.6 trillion of assets under management, with two-thirds made up of institutional investors. Therefore, regulators expect these institutions to help police the financial market against the risks of corporate misconduct and fraud. Yet, even after the financial crisis of 2007–2008 and the increased policy emphasis on responsible and engaged ownership, many financial institutions remained passive and disinterested in exercising proper oversight of their investee companies.
FCA/FRC consultation on stewardship has found evidence that some firms are already investing significantly to improve their stewardship capabilities and with a stronger focus on environmental, social and governance (ESG) matters. However, a number of informational, incentive and other barriers to effective stewardship were also identified, including a lack of clarity of purpose around stewardship and how investors should discharge their stewardship duties.
That is why it was very encouraging to see, for the first time, the key financial services regulators such as the FCA, FRC, DWP and TPR come together with representatives from right across the institutional investment community and academia to discuss how some of these barriers may be overcome. In particular, the workshop explored how asset owners set and communicate their stewardship objectives, and how effectively these are adopted by asset managers and service providers.
Around 40 key stakeholders from across the institutional investment community attended the workshop. As one of the very few academics involved in these discussions, I found them very engaging, challenging and constructive. Many delegates saw considerable value in bringing all relevant constituencies together in an open, honest and multi-faceted discussion on this topic. For example, I was able to challenge the biggest asset managers on the levels of their investment in stewardship, which are currently much too low for such activities to be meaningful and effective – a point of view that was shared by many delegates.
I also highlighted my published research suggesting that some contracts also included terms that may be incompatible with a long-term investment strategy (e.g. quarterly performance evaluation). It was also very encouraging to observe an emerging consensus among delegates that investment consultants ought to consider stewardship more systematically in asset management selection decisions – this is something I have been advocating for many years through my research impact activities. The FCA’s delegate debrief summary included all these important discussions as evidence for future reference in this consultation process.
Having a joined-up policy approach to improving investor stewardship is a very positive development. However, the follow-up activities are in danger of losing momentum in the current climate where the Covid-19 pandemic has inevitably interrupted the work of these interest groups and delayed progress towards finalising the recommendations that came out of this forward- looking initiative.
Although it may be too easy now to focus on the immediate and short-term market volatility, there is already evidence to suggest that effective stewardship and ESG-focused investments can be more durable through the current market meltdown. During these difficult and uncertain times, resilient and long-term relationships between asset owners, asset managers and investee companies, as well as exercising effective stewardship, will play a critical part.