On May 17-19, 2021, Risk.net hosted their ESG and Sustainable Investing conference, bringing together 350 senior directors to explore how ESG principles and sustainable investing will re-shape the global financial market. Speaking on a panel discussing stewardship, fiduciary duty and shareholder engagement – “Using investor influence for a positive, transformational change” – Mark Manning, the Financial Conduct Authority’s (FCA’s) sustainable finance technical specialist, is reported to have said that “an investor either needs to inject capital into new, purposeful and impactful projects, or use active-investor stewardship and influence to drive meaningful change in investing companies’ strategies”.
Continue reading for more details and analysis regarding stewardship and sustainable investing.
The FCA and Stewardship
This latest announcement continues the FCA’s engagement with stewardship responsibilities and how it can help drive the transition towards a net-zero economy.
In March 2021, the Chancellor of the Exchequer asked the FCA to support the government’s aim to “achieve a net-zero economy by 2050”.
In December 2020 the FCA introduced a “comply or explain” requirement for premium-listed companies to make climate-related disclosures. Companies are required to include a statement in their annual financial report which sets out whether their disclosures are consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), and to explain if they have not done so. The Investment Association’s (IA’s) Good Stewardship Guide 2021 stated that the number of companies in the FTSE 100 reporting against at least some aspect of TCFD has more than doubled from 30 in 2019 to 77 in 2020.
UK Stewardship Code 2020
The UK’s accounting regulator, the Financial Reporting Council (FRC) published the UK Stewardship Code 2020 last autumn that requires every professional investor in the UK to decide how they approach effective stewardship. The boards of asset owners, asset managers and other service providers must sign off on the code, which has led to directors asking more questions. Claudia Chapman, the FRC’s head of stewardship, is reported to have told the conference that “there is an expectation that investors are not only delivering to their clients and beneficiaries, but are also considering the longer-term impacts of their investment decisions”.
The Code recognises that environmental factors – particularly climate change – in addition to social factors and governance, have become material issues for investors to consider when making investment decisions and undertaking stewardship.
Impact on Investor-stewards
In October 2020 the FT reported that a total of 21 shareholder resolutions focused on social or environmental issues received the support of a majority of investors last year at companies around the world. This was up from 13 in 2019 and 2018, and five in 2017, according to Proxy Insight.
As to what constitutes good stewardship, the IA’s Good Stewardship Guide 2021 identified three key areas where investors put pressure on companies: climate change action, climate risk governance and “Paris-alignment”, i.e., consideration of the goals of the Paris Agreement when preparing and signing off on the company’s accounts.
Valeria Piani, an executive director at UBS Asset Management, is reported to have told the conference that her firm’s stewardship report almost tripled in size from 30 to 89 pages because of the new expectations from the FRC. One reason for the increased reporting is that money managers in the UK must now monitor and engage with companies on the full range of investment products and underlying assets, rather than equities alone.