Why stewardship failures pose questions for the entire asset management industry

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Updates on ESG Investments

“Financing the future is a privilege; we use it wisely and responsibly, ”reads a report from an asset manager who was not one of the first signatories of the UK’s new management code.

Another hopeful code signatory who cited the “myriad of nuances that a responsible investor must embrace” found that the nuance didn’t win them room either. “We know you rely on us to do our part,” said a third, who was also deemed insufficient in a Financial Reporting Council review of how investors hold companies to account.

That was, in a sense, the point of the exercise: a welcome attempt to separate the substance from the gloss that accompanies stewardship or responsible investing.

There were around 300 signatories to the old code, dismissed by Sir John Kingman in 2018 as “well-meaning” but “not effective”. This was reduced to 125, about two-thirds of those who requested, after the FRC’s assessment.

The numbers, at first glance, serve to highlight how much flannel there is in the world of asset management, as the focus on ESG and responsible investing grows. As for asset owners and service providers, over 80% of applicants were approved as signatories. But in asset management, barely 60 percent are successful.

Trying to penetrate the clouds of good intentions and green breath, the FRC asked for evidence and examples to support the type of policy statements cited above to enable them to assess different business models, styles of business investment or policies. The result: Too many people cannot demonstrate that they are doing what they say they are doing.

This means that the process was not always comparable. Of course, it’s embarrassing that a blue chip like Schroders didn’t score while an index fund giant like Vanguard and smaller peers did, especially since the fund fees assets defied gravity even as an overseas downpour, tracker money decreased their weight in the UK market.

But Schroders’ main sin appears to have been the format of his submission rather than the underlying content, according to people familiar with the details. The approaches examined could be very different from one institution to another. Adjustments were also made for the size of the claimant. More information on submissions might help – and the FRC is considering a scoring system (beyond pass / fail) for next year.

More generally, there is a danger that checkboxes and boilerplates shift from reports and policies to writing letters and meetings necessary to show practical effect. “Endless bureaucracy,” commented one fund manager (whose organization cut the cut), noting the irony that this deluge of engagement will come just as companies themselves are forced to post more on their consideration of groups beyond their investors.

One possible disconnect is whether this whirlwind of activity translates into a willingness to stand up and be counted when serious problems arise: Vectura shareholders have been remarkably silent on whether a tobacco company is. a good buyer for the group of inhalers.

Another question is whether the investment operations and governance teams within large groups are really aligned or not: on some occasions, as in the case of governance issues raised around the Bridgepoint rating, the function management can apparently be left catching up once investment decisions are made.

The backdrop here is concern that the UK market is sluggish, too risk averse and too dividend-focused to help companies raise valuations, given the constant flow of corporate takeover bids. listed.

The Stewardship Code covers the day-to-day affairs of strategy, risk and performance, as well as ESG issues that are increasingly important in attracting money from clients. Showing how these work well over time remains a question for the entire sector, whether or not they are admitted as signatories of the code.

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