Demonstrating the G of ESG

Demonstrating the G of ESG

A third of aspiring signatories to the FRC’s UK Stewardship Code this year didn’t make the cut. With all eyes on clarity around ESG investing, being able to demonstrate effective governance is key.

At COP26, the IFRS Foundation announced a new body that from 2022 will set international standards for sustainability disclosure to prevent greenwashing. The broad and undefined nature of ESG investing has been the biggest criticism levelled at the movement. To address this, the industry has made an increasing number of attempts to standardise the rules. Often, the hardest of the three sustainable elements to define is ‘governance’.

This was made clear when earlier this year, The Financial Reporting Council (FRC) revealed who had made the ‘UK Stewardship Code Signatories 2020’ list. Of the 189 applications they received – including 147 asset managers, 28 asset owners (including pension funds and insurers), and 14 service providers – a third failed to meet the requirements.

The FRC UK Stewardship Code, originally published in 2012, comprises a set of 12 ‘comply or explain’ principles for asset managers and asset owners. 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.” In the last 10 years, the idea that companies have a duty to provide sustainable benefits not just for themselves, but for wider society, has greatly risen in prominence.

To reflect this, and in an effort to dissuade greenwashing, the FRC revisited the Code in 2020, to lay down more stringent terms for compliance. The revised code dictated that signatories needed not only to describe their actions in selecting investments, but also to provide evidence on what the outcomes of those actions were.

What is surprising about some of the big names that didn’t make the initial cut is that these companies simply fell foul of the required reporting formats. Essentially they had done all the hard work in complying with the code; they just didn’t get the admin part right. And although firms did express that the process was confusing, there will likely have been some poor souls who were hauled before management to explain themselves.

The reapplication window for 2021 is now closed. However, it will open again in April 2022. For those that failed to ‘comply or explain’ their stewardship approach, it’s worth recapping on what the FRC is keen to see from firms.

The first step on the road to governance redemption is to heed the feedback given by FRC. If the format of application was wrong then work needs to be done to rectify what, on the face of it, should be a relatively straight forward fix. The other main criticism from FRC was that firms had leaned too heavily on policy statements and had not done enough to demonstrate cases where their stated approach had been applied. FRC wants more evidence of application that asset owners are being good stewards. It is wary of greenwashing. Lastly, the regulator wants to see better reporting on the approaches to review and assurance as well as better monitoring of service providers. There is still time to address these ahead of the next slot in April.

Applicants that successfully reapplied in October will be added to the list of signatories in early 2022. The 2020 list will certainly have made firms sit up and pay fresh attention to the Stewardship Code process. Simply claiming to be green and to have good governance will no longer be enough to convince regulators of firms’ commitment to doing the right thing.

We can help

At Bovill we’ve been helping clients do the right thing for 20 years. We’re experts in meeting the regulators’ expectations when it comes to governance and conduct risk – both setting up effective systems and controls, and making sure you can demonstrate them to the regulators’ standards. We’re also closely tracking ESG developments internationally so we can help you understand your obligations.