Last month, the Financial Reporting Council (FRC) added 27 signatories to its Stewardship Code bringing its total coverage to 277 capital providers and an aggregate assets under management of £44.6trn.
Despite its narrow applicability to investing on behalf of UK savers and pensioners, the Stewardship Code has set something of a global benchmark for responsible investment practices – particularly as demand for sustainable financial and nature-based products continues to break out to new highs.
Industry pledges to universal standards are as powerful as they are purposeful. The UK Stewardship Code guides the responsible allocation of, and oversight over, capital. It shapes the outlook and actions of the companies that capital providers invest in. Importantly, it creates free-market customs: behavioural expectations which, while voluntary, are recognised as binding practices. Often, these emerge before and help shape legislation and policy. This is especially the case within responsible investing.
The Stewardship Code is a “bridge” to support responsible investment at a time when the bar of legislative requirements is low. We see this dislocation in mature public markets. The OECD reported that only half of 73 jurisdictions surveyed require or recommend boards to approve polices on sustainability-related matters, which still represent around two thirds of global market capitalisation. Voluntary commitments set upon asset managers and institutional investors cascade to public companies that discretely influence attitudes to disclosures, ESG reporting and shareholder communication.
For beneficiaries, guidelines like the Stewardship Code provide confidence that investments lead to sustainable benefits for society, the environment and the economy. For asset managers and allocators making public investments, it is an increasingly unavoidable requirement. But beyond joining because it is the right thing to do, what should compel asset managers – particularly those with global strategies – to join, and why did we?
As an asset manager with exposure to public markets and a recent signatory to the Stewardship Code, we’d urge investors to consider indirect advantages. In addition to the opportunity to codify our principles to responsible investing and conveying these to our stakeholders, we found that the process of internalising standardising our approach to ESG forced a re-think as to gaps in our knowledge and areas of difference across our product suite, not least in emerging markets.
Guidelines for private market strategies are thin on the ground. Natural capital is one example: we invest in agriculture and work directly with farmers injecting investment to support economies of scale. The basic framework of the Stewardship Code has served as an effective template for responsible investment that can be applied to strategies in nature-based solutions, real estate and infrastructure, to name a few.
A challenge for multi-asset managers is that many ESG frameworks and tools are specific to particular asset classes. An attraction in the Stewardship Code lies in its applicability across different venues for investment. Moreover, some of our investments are publicly listed and some are private, across a wide geography. There are numerous competing pledges, standards and certifications that seek to normalise ESG considerations across the investment cycle, but few provided are genuinely universal and undoubtedly the Stewardship Code will be foundational for international standards in the near future.
There were other compelling reasons. For one, the Stewardship Code focuses a company’s attention on the alignment of our corporate purpose, culture and investment ethos – as well as arranging responsibilities. For the many publicly listed companies and issuers we interact with its vital assurance that we’re cognisant of the full range of risks that would otherwise affect enterprise resilience. The Stewardship Code is particularly helpful in refining reporting lines across our sustainable investing experts, from a board level to ESG heads – and to continuously update our practices to remain at the frontier of responsible investing.
While there is a gravitation in ESG circles toward becoming more data-driven, there is power in a code that is asset-agnostic and principles-based. And, as well as minimising adaptational pressure and speeding up adoption of a whole host of different ESG investment methodologies, we’d expect major developments in responsible investment practices to be layered on the Stewardship Code – which is quickly becoming the common language for understanding responsible investment.