The Rise of Stewardship
Stewardship was a significant theme at the recent Responsible Investment Association Australasia (RIAA) conference in Australia and at a related event in Auckland. Visiting speaker Claudia Chapman, Head of Stewardship at the UK’s Financial Reporting Council (FRC) made presentations at both events.
Claudia talked about the emergence of a stewardship code as an essential element of trust building in the UK following the Global Financial Crisis when confidence in banks and financial institutions was at an all-time low. In response, the UK Government commissioned a review. One of the headlines that came from the review was that investment managers were “absentee landlords and asleep at the wheel”.
Based on a recommendation of the review the UK established a Stewardship Code in 2010. This was a world first. The UK code emphasises the importance of fund managers undertaking active ownership, voting and reporting on voting records and engagement with investee companies on ESG issues, and providing transparent reporting. By signing up to the code, fund managers commit to principles that encourage long-term value creation, effective risk management, and responsible investment decision-making.
Claudia noted that fundamental to the integrity of the Code was the idea that fund managers and other financial market participants shouldn’t be allowed to “set and mark their own homework”. In the UK, an independent third party organisation, the Financial Reporting Council (FRC) manages applications to be accepted as a code signatory. Signatories are then required to report on their compliance with the code to the FRC.
In the Foreword to the UK ‘Review of Stewardship Reporting 2022’, the FRC CEO Sir Jonathan Thompson explains that the Stewardship Code works in tandem with the Corporate Governance Code to encourage quality reporting and accountability. He highlights a pleasing increase in transparency of organisational purpose although “there is still some way to go on reporting outcomes”.
Stewardship codes have the potential to drive positive change at a systemic level. Over the past 13 years, the number of Stewardship Codes and signatories has increased dramatically. There are now more than 40 stewardship codes or initiatives across 20-plus jurisdictions.
New Zealand’s own stewardship code was established in 2017 and recognises the importance of incorporation of material environmental, social and governance (ESG) matters, and consideration of a Te Ao Māori worldview. The NZ Stewardship Code is housed by a secretariat jointly managed by the Toitū Tahua: Centre for Sustainable Finance (CSF) and the Responsible Investment Association Australasia (RIAA).
RIAA CEO Simon O’Connor has explained that “By shedding light on the conversations taking place between investors and investees, these codes work to increase accountability on both sides. It's easy for a fund manager to say that they're doing a lot of engagement and voting, but unless they lay it out in a report that shows what some of the outcomes are and gives case studies, then it can be prone to a form of greenwashing.”
For Money Matters, stewardship codes provide another method to evaluate fund managers and encourage investment activity that aligns with our clients’ desires to make money and make a difference by contributing to a more sustainable future.