Raising the Bar on Stewardship Raising the Bar on Stewardship

It’s clear that many firms underestimated the task of implementing the revamped 2020 Stewardship Code. A third of the applicants who sought to become inaugural signatories to the new Code were turned down by the Financial Reporting Council (FRC) in September owing to the quality of their stewardship reports, with over 100 asset managers who were previously signatories dropping off this year's list.

While the Code is voluntary, many investors expect their managers to be signatories and adhere to the Code’s 12 broad principles. Moreover, with Environmental, Social, and Governance (ESG) and greenwashing concerns a priority with regulators globally, failing to properly implement the Code represents both a reputational and a regulatory risk.

The 2020 Stewardship Code sets a significantly higher bar than the Code’s previous incarnation. It introduces several new principles that must be implemented and reported on, and the expectation is now that signatories implement the code across all asset classes – not just listed equity. Most importantly, the new Code emphasises using real world examples and case studies in reporting to demonstrate how the Code has been put into practice.

We’ve seen the following common weaknesses and pitfalls in reporting:

• Evidence and depth – It's clear from the FRC's feedback that many of the rejected applicants failed to evidence their approach properly, relying too heavily on broad statements of policy and not giving enough real-world examples and case studies of stewardship in practice.
• Addressing all principles – Signatories must apply and report on all 12 of the Code’s principles. Not all applicants addressed every principle in their report.
• Continuous improvement – Several principles require signatories to reflect on their approach and be candid about what has worked well and what has not. High quality reports portray signatories as being on a journey that involves continuous improvement of their stewardship practices.

Based on our experience supporting successful signatories during the first round of reporting, we’d highlight the following key lessons:

1. Do not underestimate the amount of work involved – It’s no great exaggeration to say that it was possible to meet the reporting expectations under the old Code by sitting in a quiet room for a few days with a stack of policies and marketing collateral and distilling the relevant material into a stewardship report. However, satisfying the new Code’s more robust assessment criteria requires input from a wide range of stakeholders across multiple investment teams, second line functions and senior leadership to build a strong suite of case studies and evidence and to ensure differences in approach across investments teams and asset classes are properly reflected.
2. Identify your gaps – Firms intending to apply during the next application windows in October and March should carry out a gap analysis to ensure they have implemented each of the Code’s principles across their business. Where weaknesses are identified, ensure you have a strong story to tell about how you will improve.
3. Benchmark against your peers – With the first batch of reporting now publicly available, there is a wealth of information available on how your peers are addressing their stewardship challenges. Use this to assess how your approach compares to similar firms and identify best practice, particularly in areas where you are struggling to articulate your approach.
4. Line by line review – Before submitting your report, ensure you have reviewed it against each of the reporting expectations set out in the Code. This is particularly important if your report does not take a principle-by-principle approach to structure.   

If you need help drafting your report, gathering case studies and examples from your investment teams or an independent pair of eyes to review your draft against the reporting expectations, get in touch to hear how we can help!