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Stewardship is one of the five principles against which products are assessed to qualify for one of the FCA’s proposed sustainability investment labels. But designing a new stewardship framework ahead of the new regime could be time consuming. Looking to the UK Stewardship Code may be a useful place to start.
In October the FCA published its Consultation Paper 22/20 “Sustainability Disclosure Requirements (SDR) and investment labels”. The paper contains proposals for UK authorised funds, UK Alternative Investment Funds and portfolio managers to be able to use one of three investment labels: Sustainable Focus, Sustainable Improvers and Sustainable Impact. Firms may opt to use these labels to develop their sustainable or responsible investment proposition or to avoid the consequences of the proposed naming and marketing rules which prohibit using any sustainability-related terms in marketing.
One of the five overarching principles for a product to qualify for a label is stewardship:
“Principle 5, Stewardship: A firm must maintain its active investor stewardship strategy and resources (at firm-level or product-level) in a manner consistent with the sustainable investment product’s sustainability objective”.
A firm’s approach to Stewardship, including relevant Key Performance Indicators (KPIs) on Stewardship, will also be a part of the detailed ongoing sustainability product reports, that are required for any in scope product with an investment label.
The consultation is still open for responses, and changes to the proposals are possible, but if you believe you will be in scope there are several actions you can be taking now to prepare.
If you are thinking of going down the labelling route, one priority should be to look at your stewardship framework and how well it might support your labelled products. If you need to build or re-build your stewardship framework and design your KPIs in advance of the labelling rules coming into effect mid-2024, we advise beginning the necessary work in advance in 2023.
One way to manage and demonstrate strong stewardship would be to become a signatory to the UK Stewardship Code.
What is the UK Stewardship Code?
The UK Stewardship Code 2020 was published by the Financial Reporting Council and is a voluntary code which applies to asset managers, asset owners and service providers. Following the most recent assessment, the Code now has 236 signatories.
The Code defines stewardship as “the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society”. Its scope covers not just listed equities, but all asset classes, including fixed income, real estate and infrastructure investments made both in and outside the UK. It also covers private equity and venture capital investments, although many firms in those sectors have chosen to be signatories to the Principles for Responsible Investment as an alternative that might be more relevant for their businesses.
The Code has 12 “apply and explain” principles for asset managers and asset owners, grouped under four headings:
Purpose and governance
- Purpose, strategy and culture
- Governance, resources and incentives
- Conflicts of interest
- Promoting well-functioning markets
- Review and assurance
Investment approach
- Client and beneficiary needs
- Stewardship, investment and ESG integration
- Monitoring managers and service providers
Engagement
- Engagement
- Collaboration
- Escalation
Exercising rights and responsibilities
- Exercising rights and responsibilities
In relation to ESG, Principle 7 for asset managers includes the reporting expectations that include explaining the processes they have used to:
- Integrate stewardship and investment, including material ESG issues, to align with the investment time horizons of clients and/or beneficiaries. and;
- Ensure service providers have received clear and actionable criteria to support integration of stewardship and investment, including material ESG issues.
New signatories are accepted twice each year (the next window is April 2023) and applicants will have to submit an annual Stewardship Report explaining how they have applied the Code over a 12-month period. Stewardship Reports are assessed against the principles and reporting expectations of the Code in a way that is proportionate to the organisation’s size and type. These reports vary in length from a few pages to over 100 pages for larger asset managers.
Application of the Code
It’s important to remember the FCA’s requirement in COBS 2.2.3R (COBS 2.2A.5 for MiFID business) which, , states that:
“A firm, other than a venture capital firm, which is managing investments for a professional client that is not a natural person must disclose clearly on its website, or if it does not have a website in another accessible form:
- the nature of its commitment to the Financial Reporting Council’s Stewardship Code; or
- where it does not commit to the Code, its alternative investment strategy.”
Additionally, COBS 2.3, which applies, amongst others, to UK MiFID investment firms and UCITS/AIF management companies, gives the FCA’s rules for the Shareholder Rights Directive (SRD), and includes the regulations regarding a firm’s engagement policy and disclosure in respect of its voting rights in listed equities.
Whilst many firms may have concentrated on the SRD aspects of the Code, we are seeing an increasing interest from those not subject to the directive who see the voluntary application of the Stewardship Code as beneficial to their business, especially when seeking to evidence their stewardship credentials in ESG.
In the absence of concrete proposals by the FCA on how firms should approach enhancing their stewardship programmes, the Stewardship Code provisions are a good place to start.
How we can help
We can help you develop a strong stewardship framework – whether it be an independent review of your current framework, policy writing or building a stewardship framework from scratch to incorporate aspects or all the Stewardship Code’s provisions.
We are working with clients on all areas of the SDR proposals as well as engaging in the consultation with trade associations and others across the industry.
You can learn more about SDR in our recent article: SDR brings long-awaited answers but raises pressing questions or by requesting a recording of our recent webinar: Understanding the FCA’s Sustainability Disclosure Requirements.
We’d be delighted to hear your views.
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