The UK’s Financial Reporting Council (FRC) has revealed its first Stewardship Code tiering. For the first time, asset manager laggards have been threatened with de-listing; those in the lower tier 3 have been six months to improve.
There are nearly 300 signatories to the Code, more than 120 are in the top tier 1, an increase from approximately 40 at the beginning of the exercise. This represents nearly 90% of assets under management of members of the Investment Association. The FRC began the tiering process in December last year and wrote to all the existing signatories. Following this contact the regulator said over 200 fund managers approached it to improve their reporting against the code.
The assessments focused on the quality of descriptions of signatories’ approach to stewardship and their explanations in accordance with the ‘comply or explain’ basis of the Code.
Constructive Approach by Fund Managers
Speaking to Manifest in August David Styles, Director of Corporate Governance at the FRC, explained that the exercise had generated positive feedback from fund managers. As a result, the regulator decided to move from just two tiers as had been originally proposed to three. This he said would distinguish between those signatories who had made efforts to improve their reporting but not yet achieved tier one, and those who had not improved their statements at all.
He said: “The process has been positive and constructive. A significant number of signatories have contacted us, saying they want to improve. They appreciated our individual approach to each of them and many admitted they do a lot more stewardship work than they are reporting on.”
He added: “We want to give everyone the opportunity to improve their reporting.”
Clients can hold fund managers to account on stewardship issues
The FRC hopes that the tiering of fund managers will also help clients, such as pension funds, who should now be better placed to use the more transparent reporting to discuss with asset managers their different approaches to stewardship and ensure that these best meet their needs. The assessment of fund managers was welcomed by ShareAction, which campaigns for more responsible share ownership and encourages pension fund members to take more control of the money invested on their behalf.
Stewardship stakeholders welcome findings
Catherine Howarth ShareAction Chief Executive said: “We welcome this valuable exercise by the FRC. “Tiering is a critical tool to hold fund managers to account on their stewardship activities. The Stewardship Code will only function effectively if the high standards expected of its signatories are monitored and enforced.
“ShareAction’s annual stewardship and transparency rankings of fund managers and pension funds reveal that while some do serious work on stewardship, the industry as a whole is falling short of the standard needed to properly protect UK pension savers. Effective stewardship of companies by professional investors is essential when millions of us rely on long-term returns from private pensions for our income in retirement. Box ticking is not good enough.”
The assessment of UK fund managers was also welcomed by the International Integrated Reporting Council (IIRC). The IIRC is a global ESG reporting coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs. Richard Howitt, its chief executive said: “The adoption of stewardship codes is becoming a feature of best practice corporate governance around the world. The FRC’s focus on ensuring the highest quality of reporting by fund managers against the code sets a new benchmark.
“The advancement of investor stewardship, alongside strong corporate governance, is creating the conditions for better dialogue between boards and investors. Increasingly this dialogue is based on strategic information which is at the heart of the whole movement towards integrated reporting by companies worldwide.”