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“Funding the future is a privilege; we use it wisely and responsibly” reads the report of one asset manager that did not make the grade as one of the first signatories to the UK’s new stewardship code.
Another hopeful code-signer that cited the “myriad nuances a responsible investor needs to embrace” found nuance did not earn them a place either. “We know you are counting on us to do our part,” said a third, which was also deemed to have fallen short in a review by the Financial Reporting Council of how investors hold companies to account.
This was, in a sense, the point of the exercise: a welcome attempt to separate the substance from the gloss that comes with stewardship or responsible investing.
There were about 300 signatories to the old Code, dismissed by Sir John Kingman in 2018 as “well intentioned” but “not effective”. That has been whittled down to 125, about two-thirds of those that applied, after the FRC assessment.
The figures, at face value, serve to emphasise just how much flannel there is in the world of asset management, as the focus on ESG and responsible investing grows. When it came to asset owners and service providers, more than 80 per cent of applicants were approved as signatories. But in asset management, barely 60 per cent made the grade.
In trying to penetrate the clouds of well-meaning and green guff, the FRC asked for evidence and examples to support the type of policy statements cited above to allow them to assess different business models, investment styles or policies. The result: too many can’t demonstrate that they are doing what they say they are doing.
That means the process was not always comparing like with like. Sure, it is embarrassing that a blue-chip such as Schroders did not make the grade while an index-fund giant like Vanguard and smaller peers did, especially as active fund fees have defied gravity even as a deluge of overseas, tracker money has diminished their weight in the UK market.
But Schroders’ key sin seems to have been the format of its submission rather than the underlying content, according to people familiar with the details. The approaches being vetted could be quite different between institutions. Allowances were also made for the size of the applicant. More information about submissions could help — and the FRC is considering a grading system (beyond pass/fail) for next year.
More broadly, there is a danger that box-ticking and boilerplate moves from reports and policies to the letter writing and meetings needed to show practical effect. “Endless bureaucracy”, commented one fund manager (whose organisation did make the cut), noting the irony that this deluge of engagement will come just as companies themselves are compelled to publish more about their consideration of groups beyond their investors.
One possible disconnect is whether this flurry of activity translates into a willingness to stand up and be counted when serious issues arise: shareholders in Vectura have been remarkably quiet on whether a tobacco company is a good buyer for the inhaler group.
Another is whether the investment operations and governance teams within big groups are really in harmony or not: on some occasions, as with governance concerns raised around the Bridgepoint listing, the stewardship function can seemingly be left playing catch-up after investment decisions are made.
The backdrop here is concern that the UK market is sluggish, overly risk averse and too focused on dividends to support companies in boosting valuations, given the steady stream of takeover bids for listed companies.
The stewardship code covers the bog-standard business of strategy, risk and performance — as well as the ESG issues that are ever more important in attracting clients’ money. Showing how those work together well in the long term remains a question for the whole sector, admitted as code signatories or otherwise.