Managers improving stewardship disclosure, but ESG has a way to go

Asset managers and owners have in recent years recognised that engaging with executive boards on a variety of governance issues can lead to greater returns, or minimised risk. However, implementation of such strategies can often prove difficult, or is not prioritised.

David Styles, director of corporate governance at the FRC, said he was happy asset managers are better at showing their pension fund clients how they practice stewardship, but cautioned that there is some way to go.

Trustees should have a long-term focus, but the problem is, most of them are shortsighted

Richard Butcher, PTL

The FRC sorts signatories to its UK Stewardship Code into tiers, to help clients – including pension funds – assess their managers’ engagement on ESG issues.

Speaking at Skytop Strategies’ Shareholder Engagement and Communication conference, Styles noted the considerable improvement since the introduction of the tiering process.

“We had a very pleasing and very constructive response from everybody,” he said. “We moved from a situation where we had between 10 and 20 asset managers in tier one on the quality reporting to now [having] around 80.”

Work still to do

The FRC identified around 40 signatories whose disclosure practices were in the bottom tier, and Styles aimed to improve this number by working closely with managers.

However, some asset management firms reportedly declined to sign up to the Stewardship Code on the basis that they “don't do ESG”, despite the code not making any specific reference to ESG.

Styles accepted that this response might be partly driven by a lack of demand from pension fund clients, especially where they have diverse portfolios that may address governance elsewhere.

But he hoped the tiering process would boost transparency, and therefore drive asset owner interest in stewardship practices.

“It was intended so that clients can look at the information and judge whether people who are engaging on their behalf are doing what they say they’re doing,” he said.

Investor stewardship

In broad terms, the logic behind investor stewardship and ESG investment remains, both financially and ethically.

Backtesting for the HSBC Bank UK Retirement Fund’s ESG smart beta default, launched over the summer by Legal & General Investment Management, showed a positive tracking error of 60 basis points from the same factor strategy with no ESG tilt.

And as Deborah Gilshan, head of sustainable ownership at RPMI Railpen, noted, effective stewardship can also go some way towards repairing the “breakdown in trust” between savers and financial services.

“It’s really important to remember who we’re actually working on behalf of,” she said. “It’s a privilege to act with public money and there’s a responsibility that comes with that.”

She recommended investors use escalation tools included in the Stewardship Code such as public announcements in order to safeguard interests in equity and bond markets, and simultaneously demonstrate the execution of fiduciary duty to members.

Is long-termism feasible?

Proponents of shareholder engagement often argue that investors and asset owners should take a longer-term approach to investing in order to be a driver of economic improvement.

“Productivity in the UK is at woeful levels,” said Andrew Ninian, director of corporate governance and engagement at the Investment Association, who said managers are beginning to encourage firms not to structure their businesses toward quarterly reports.

But while the logic for long-term investing remains stark, in practice it may not suit the needs of either asset managers, pension fund clients or even their investment consultants.

“Trustees should have a long-term focus, but the problem is, most of them are shortsighted,” said Richard Butcher, managing director at PTL, explaining that intense scrutiny of deficit changes means many boards come in for criticism if they ignore short-term volatility.

“You can’t just give [managers] the money and come back in seven years and say ‘how’s it gone?’” he added.

Meanwhile, asset managers often tailor strategy and reporting to suit quarterly investment reviews, and the as-yet unregulated consultancy industry makes money from recommending changes to investment strategy, he said.

Butcher also noted the up-front cost of implementing ESG strategies and lack of time for its consideration in busy agendas. In solving this problem, he anticipated the need for regulatory intervention and trustee willingness to stand behind long-term decisions.