Questions are being asked regarding the role of corporations in society. Similarly, expectations regarding the role of shareholders are changing and proposed changes to the UK Stewardship Code reflect this.
The Code sets the framework for how fund managers should think about the companies they invest in and hold them to account. The first of its kind was established after the global financial crisis and has now been replicated in a number of other markets. The most recent iteration being the EU Shareholder Rights Directive.
In fact, on the face of it, the rest of the world has now caught up with the UK on stewardship. In response (and also in response to the critical Kingman review), the FRC has come out all-guns-blazing in an attempt to regain the UK’s mantle of being a stewardship ‘leader’. Proposed changes to the Code include: a broader rationale for engagement (other than short-term corporate governance), a wider range of asset classes, and better reporting of engagement outcomes. It also seeks to get other players in the investment value chain, not just the asset managers (e.g. the asset owners), to pay more attention to stewardship activity. The climate crisis is also specifically carved out as a stewardship issue.
Fine. Like many other sectors, the asset management industry needs to do more and explain the role that it plays in society. But ‘society’ and the readers of ‘engagement reports’ also need to recognise that as fund providers, our fiduciary (legal) responsibility remains to our clients. The mug on my desk says, ‘capitalists with a conscience’; there is a role for us to engage with companies on ESG when we believe our investors capital is at risk or where there are opportunities for investee companies to benefit from environmental/societal drivers. As we have previously said, ‘who cares wins’ , so we are more than willing to challenge companies and their executive management teams on a range of ESG issues, including on long-term strategic issues like climate. For instance, we were one of the few institutional investors to support the Follow This shareholder resolution at BP’s AGM; which sought the company to set emission intensity targets for the fuels that it sells. Finally, as active investors, if we need to, we have the ultimate sanction available to us, an ability to sell the shares of any company when we feel the ESG risks are too great.
Not shying away from voting against management:
Source: ShareAction. Proxy Voting Policy & Practice: Charity Asset Managers in Focus Investor Report December 2018
But we also need to be honest and pragmatic about what and how much we can achieve in our engagement efforts. The rationale for any stewardship activity must always be investment performance. Bear in mind that a lack of engagement reporting by a fund provider could mean they are (mostly) investing in the ‘right’ companies! Asset management has an important role to play in society, but it can’t fix all its ills or fill the void left where governments fail to prepare for the future.