Stewardship Code to focus on ESG and lending

The Stewardship Code was unveiled a year ago, but despite so far receiving more than 170 signatories, just 22 are UK pension schemes.

The code is a set of principles aimed at institutional investors, which seeks to improve their shareholder engagement and make them more responsible for the running of the companies in which they invest.

This comes from the belief that if investors are more engaged with their investee companies, they will improve those companies' governance practices, which will eventually lead to less volatile and better performing investments.

The seven principles include requirements to monitor investee companies and have a clear policy on shareholder voting and disclosure of their voting activity. This is an attempt to make shareholders have a greater interest and influence on the companies in which they invest.

But schemes wishing to sign up to the code can expect a more rigorous approach to the relationship between stock lending and voting on shares incorporated later this year.

They should also expect to have to make ESG issues central to their engagement process.

Revamp expectations

Jocelyn Brown, corporate governance adviser at the FRC, said the body was looking to review the code over the summer, with a view to producing revised principles in the autumn.

She said the FRC is considering requiring schemes who lend stock to recall them whenever there was an opportunity to vote. This would cut down the amount of inactive shareholders.

Tom Powdrill, head of communications at shareholding service provider PIRC, said this was crucial to address a long-standing issue.

“If schemes want to maintain a sense of ownership they need to have arrangements in place to be able to recall shares when they want to vote on them,” he said.

“To be honest, most of the big pension funds which are already interested in this sort of stuff already have arrangements in place where they can recall stock to vote. But it is an issue people need to think about.”

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Dutch organisation Eumedion is currently drafting a code for the Netherlands based on the UK’s system.

The body has claimed it will be looking to go further than the FRC in its treatment of voting, as well as putting ESG issues at the core of the approach to engagement.

Simon Wong, partner at another shareholder service provider, Governance for Owners, said the FRC could learn from this approach as it had originally “watered down” some of the original proposals for the Stewardship Code, especially around the treatment of conflicts of interest.

He also called on schemes which were interested in being engaged owners to avoid treating it as a box-ticking exercise.

“If you are an asset owner it is important that you not only receive reports from your investee companies, but also have face-to-face meetings with them to find out exactly what’s going on,” he said.

“This can allow you to cover sensitivities which would not normally be covered in public documents.”

Future developments

The high number of fund managers signed up to the code is due to the requirement on them to 'comply or explain', where they must become a signatory or divulge why they have not done so.

Brown said the FRC was now going to focus on getting more schemes to sign up.

But Colin Melvin, chief executive at Hermes Equity Ownership Services – which oversees the shareholder engagement at schemes such as BT and the Lothian Pension Fund – said there was a potential barrier for schemes with fiduciary managers due to the amount of influence their managers had.

“The fiduciary managers have got nowhere to hide – they should be delivering stewardship,” he said. “The Stewardship Code presents them with a challenge.”