3 minute read 5 Sep 2019
colourful canoes

How stewardship can best be undertaken by investors and companies alike

Authors
Loree Gourley

EY UK Regulatory and Public Policy Director

Director within EY UK’s Regulatory & Public policy team. Passionate about encouraging long-term value creation, business ethics and good investor stewardship.

Brandon Perlberg

Associate Director, Regulatory and Public Policy, Ernst & Young LLP

Regulatory and public policy professional. Focused on investor stewardship, audit reform, corporate culture, diversity and inclusion, environmental, social and governance matters, and long-term value.

3 minute read 5 Sep 2019

An effective accountability framework based on good stewardship, governance and reporting is vital to rebuilding trust in business.

Within this, transparency over stewardship of investments plays a fundamental role in providing confidence to a broad range of stakeholders. And across stakeholder groups, good stewardship is recognised as a critical tool for delivering value to investors.

EY’s new research into investor stewardship reporting and engagement has been designed to enable a better understanding of how UK-based asset managers and asset owners are currently reporting on, and engaging with, their investee companies on stewardship.

The report analysed recent stewardship reporting by the 30 largest UK investors who are signatories to the UK Stewardship Code (20 asset managers and 10 asset owners), and its findings provide a comprehensive picture of investor priorities and expectations, and offer unique insights about the journey toward more transparent reporting which promotes the safe investment of capital for the long-term.

Where investors are headed

The findings offer insight into how investors prioritised the various key focus areas, such as environment, corporate governance, social impact, human capital, and strategy and performance, using a five-point stewardship scale designed to measure depths of investor stewardship activity. The results suggest that not all focus areas were given the attention they needed.

Environment leads the list

Environment is a priority investors are calling the “defining issue of our time.” Climate change commands a vastly greater stewardship focus from asset owners than any of the other 24 stewardship sub-categories reviewed. However, greater transparency on investor polices and engagement outcomes is needed to help signal expectations and evolve the operating models of exposed business sectors more quickly.

Corporate governance is top priority

Corporate governance is another top priority on investors’ stewardship agenda. However, there are still opportunities for investors to better signal their expectations to investee companies, together with explanations of the consequences if these are not met. The 2018 UK Corporate Governance Code introduced new requirements for companies to report on their consideration of stakeholder interests and identify emerging risks, both of which present opportunities for deeper investor engagement.

Climate change commands a vastly greater stewardship focus from asset owners than any of the other 24 categories.

Social impact increases in importance

Many investors see social impact linked to a company’s ability to both preserve and generate long-term value, with some offering evidence of holding boards to account on their companies’ social impact footprints. As an emerging area of importance, investors are likely to provide increasing transparency over their social impact policies and engagement activities, including how these are integrated into investment decisions.

Human capital requires attention

Despite a strong focus on human capital from companies, regulators and the wider public, investor engagement in this area appears to be generally immature. A more structured approach to human capital engagement would help enable greater consideration of stakeholder outcomes, align with societal expectations and support the creation of long-term value.

Strategy and performance lacks transparency

Investors apply a long-term lens when engaging on strategy and performance, but often identify shortfalls in how companies explain their long-term thinking, and the balance they strike between between short-term incentives and achieving long-term objectives. Greater transparency is needed on how investors press companies to deliver on their stated purpose, and in doing so build trust and create social value with stakeholders.

Listen to EY’s Loree Gourley and the Financial Reporting Council’s David Styles and Claudia Chapman discuss the implementation of the revised 2020 UK Stewardship Code:

To improve reporting practices and meet regulatory requirements, asset managers and owners will need to achieve greater transparency and clarity across all areas of stewardship

Summary

EY’s research into investor stewardship reporting and engagement shows that trust in business relies on an effective accountability framework based on proactive investor stewardship, strong corporate governance and relevant and reliable corporate reporting.

To improve their reporting practices and meet regulatory requirements, asset managers and owners will need to achieve greater transparency and clarity across all areas of stewardship, demonstrate publicly how they engage with investee companies, and better communicate the outcome of that engagement.

In turn, investee companies must prepare for greater levels of engagement, primarily through better communications with their stakeholder groups.

About this article

Authors
Loree Gourley

EY UK Regulatory and Public Policy Director

Director within EY UK’s Regulatory & Public policy team. Passionate about encouraging long-term value creation, business ethics and good investor stewardship.

Brandon Perlberg

Associate Director, Regulatory and Public Policy, Ernst & Young LLP

Regulatory and public policy professional. Focused on investor stewardship, audit reform, corporate culture, diversity and inclusion, environmental, social and governance matters, and long-term value.