Keeping a focus on stewardship

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Monitoring the approach of investors to their Stewardship Code duties is a vital part of the Financial Reporting Council's work. Claudia Chapman, who is on the corporate governance and stewardship team at the FRC, talks to Kate Heseltine, head of policy and communication at the IR Society, about the Code and more.

KH: Setting aside current market turbulence and the coronavirus crisis, how has the investment landscape evolved, especially in relation to the Stewardship Code? 
CC: Since the first Stewardship Code was published the investment landscape has changed – the capital of UK savers and beneficiaries is increasingly invested internationally and in asset classes other than listed equities. Promoting high standards of corporate governance in UK companies remains a central aim, but the Code now also expects that investors apply their stewardship approach to assets outside of UK listed equity such as corporate and government bonds, private equity and alternatives, and to assets held overseas. 
The Code also recognises the likely continued growth of index investing. While index investors are not able to sell their holdings they should not be passive when it comes to using the rights and influence they do have, on their own or with other investors and stakeholders to engage, influence and hold to account issuers. 

How might the nature of engagement between companies and investors change in the current circumstances? 
With many companies facing critical challenges to their businesses, the priorities for both companies and investors will change. Companies should consider how investors may be able to support them and certainly be keeping them up to date of key decisions – for example viability, refinancing, and those that affect employees, customers and suppliers. Investors should seek to take a long-term view and support companies, whilst continuing to question and challenge where appropriate. 

The revised Code now places ESG and climate change at the heart of effective stewardship. How do you anticipate that this will influence the dialogue between investors and issuers and the requirement for greater and more consistent disclosures in this area? 
There is increasing recognition among investors, companies and the wider public that environmental, social and governance issues can have a material impact on company performance. This ultimately affects the long term returns to the providers of capital and these issues should be considered in investment and stewardship decisions – alongside others such as capital structure, risk and audit quality. 
Recent and upcoming changes to pension trustees’ investment duties from the Department for Work and Pensions place importance on ESG and climate change. Investors will be reflecting these changes in their investment strategies and I expect we will see an increase in engagement with companies over their disclosure and action in aligning their businesses to the goals of the Paris Agreement. 
It is important for companies in turn to listen to these concerns as they are raised, and act on them where they are well- founded. One way that companies can show this is through their reporting and the Financial Conduct Authority (FCA) has an open consultation on climate disclosure rules for UK listed companies. The FRC’s work on climate-related reporting has highlighted a great deal of investor support for the Task Force on Climate-related Financial Disclosures (TCFD) framework. Reporting under this framework is a key element of the Government’s Green Finance Strategy, and reporting using the TCFD as a base is becoming a de facto investor expectation. More, and better, reporting in this area is important. The TCFD acts as a framework for reporting, but as investor and company activity and sophistication continues to grow this will in turn drive the requirement for more consistent data and information. 

Asset managers now have an obligation to monitor their service providers, such as proxy advisors and ESG data agencies. What was the rationale for this and how might it ultimately benefit companies? 
The use of third-party providers to support effective stewardship continues to grow and these organisations perform a valuable role. However, the responsibility for stewardship lies with the investor and it is critical that asset managers set clear expectations of their service providers, monitor their performance and hold them to account where they are dissatisfied. We’ve reinforced this in the new Code. 
We have also introduced six separate principles for service providers which set high expectations about the role they play in supporting their clients’ stewardship. We hope that this, alongside new rules for proxy advisors set by the FCA will improve the quality and accuracy of services and make clear that investors are ultimately responsible. 

The scope of the Code has now been extended to include a wider range of asset classes, including bonds. How might you expect this to affect the remit of the IR role and the requirement for greater interaction between IR and treasury teams within companies?
Investors should be effective stewards across the range of asset classes in which they are invested, not just equities. While bondholders may not have the same rights as shareholders, we expect to increasingly see them using their influence to engage issuers on a wider range of matters. 
Core aspects of stewardship such as allocation, monitoring and engagement can be applied to fixed income and alternative asset classes. Where investors do not have the same formal rights, they’ll need to look at the influence they do have. For example, some bondholders who are also shareholders are bringing together their fixed income and equity portfolio managers to engage on specific issues with companies. 
Companies should think about what information they provide to their bondholders and shareholders. There may be access that shareholders have that bondholders could benefit from. There is an opportunity for greater coordination between IR and treasury teams to ensure that together they are meeting the needs of a wider range of investors and stakeholders with different priorities. 

Is the revised Code likely to increase the burden on listed companies? How does the FRC balance this and the need for companies to remain competitive in global markets against the requirement for enhanced governance and stewardship to promote trust in our financial markets? 
While we intend this to encourage greater attention for investors to the holdings in their portfolio, we are not looking to drive more engagement for the sake of it. Rather, the emphasis of the Code and our assessment of investors is on effective engagement. Also, by requiring investors to make their report publicly available on their websites we expect this to provide a useful source of information for companies, who will be able to get a better understanding of the stewardship activities of their key investors. 

What are the main areas you would like to see issuers focus on over the next 12- 18 months and how will you be engaging with issuers to review the impact of the new Code? 
In the short term, companies should certainly be communicating with their investors about the impact the coronavirus crisis is having on their business and how they are responding to it. Beyond that, we would encourage issuers to speak with their investors to understand their expectations and how they may have changed as a result of the new Code. 

This article was first published in the Spring 2020 issue of Informed, the IR Society's quarterly journal.

Published 24 April, 2020