As UK Stewardship Code reporting season draws closer – we thought it would be a good opportunity to take stock of the state of the market on stewardship and active ownership and reflect on some of the trends we have observed.
Three key drivers are pushing stewardship up the agenda of investors and regulators globally:
- Net zero – With many investors having set themselves ambitious net zero targets, engagement is a key tool in achieving this by helping them to shift investee companies on that same pathway.
- Regulation – In addition to the 2020 update of the UK Stewardship Code, the FCA’s proposals for sustainability disclosures and labels for investment products include substantive reporting requirements on stewardship and engagement. The government has also confirmed that it will work with the FRC and regulators in 2023 to review the regulatory framework for effective stewardship.
- Product Innovation – As asset managers launch new sustainable products, effective and innovative active ownership can be used as a differentiator.
We think these trends will continue to build momentum, resulting in an increasing focus on stewardship.
Key focus areas
Given the increasingly prominent role stewardship and engagement is taking with regulators and investors, we have seen an increasing number of managers reviewing their stewardship operating model with a view to making enhancements to the tools and methods they use to influence investee companies.
Four areas stand out as priorities:
1. Governance and strategy – Enhancing their stewardship strategy and governance arrangements to include clearly allocated and defined responsibilities for setting stewardship and engagement strategy, managing escalation and high-profile engagements and overseeing the stewardship programme on a macro and product level.
2. Internal collaboration – Increasingly, managers are seeking to foster greater collaboration and feedback mechanisms across relevant functions, to create deeper and more impactful engagements. This includes the creation of new ways of working and focussed cross-functional working groups to bring together different stakeholders across portfolio management, research and sustainable investment functions to deliver engagements with particular issuers or on a particular theme.
3. Data and reporting – Managers are investing in their stewardship tooling and systems to ensure they can comprehensively record, monitor and track their engagement activity. Being able to produce consistent, outcomes-focussed case studies alongside quantitative information is a clear expectation for Stewardship Code signatories and is increasingly expected by investors. High quality, insightful analytics from enhanced stewardship tooling can also be used to improve the quality and impact of engagement programmes.
4. Democratisation – Managers are exploring the use of innovative applications and technology which enable end investors and clients to better share their views and have greater influence and participation in stewardship and proxy voting activity via pass-through voting.
Next steps
We would encourage firms to use their upcoming Stewardship Code reporting period as an opportunity to reflect on the effectiveness of their stewardship and engagement operating model and in particular, the ability of their technology in place to inform their forward-looking approach in addition to reporting.
Asset managers may be meeting the expectations of their clients and other stakeholders today. However, as with so many other topics on the ESG agenda, market practice and regulatory expectations on stewardship and engagement are moving quickly. Without regular self-reflection and evaluation, managers risk being left behind their peers.
