The UK Stewardship Code 2020 has raised the bar in terms of what is expected from asset owners, and urgent action is required to ensure increased regulatory standards are met by next March’s deadline, according to a new EY report.
The report reveals that with the added impact of COVID-19 and the resultant economic downturn, it’s never been more important for insurers (as asset owners with over £2 trillion in AUM for UK insurers alone) to use their influence to shape investment strategies that fit the evolving values and priorities of the investors they represent.
This is EY’s second insights paper on investor stewardship, which assesses how the UK’s top 39 asset owners and assetmanagers are reporting on and engaging with their investee companies¹ since the Code came into effect earlier this year. The first was published in September 2019.
The findings show that asset managers are largely on track with their stewardship activities but that asset owners urgently need to overhaul their stewardship approach to meet stakeholder expectations and be considered as signatories of the new code. Failure to become signatories could have regulatory compliance and reputational repercussions. The deadline for submitting reports is 31 March 2021.
New code requirements
The UK Stewardship Code (administered jointly by the FRC and the FCA) seeks to guarantee the responsible allocation, management and oversight of capital to create long-term value benefitting the economy, the environment and society. The 2020 version of the Code introduces a range of new requirements, including prohibiting asset owners delegating responsibilities to asset managers; an increased focus on engagement activity and outcomes; and a stronger call for fair and balanced reporting, with ESG to be embedded within all investment decisions.
Gill Lofts, EMEIA Sustainable Finance Leader at EY, comments: “We’re at a crucial crossroads in the journey to a more sustainable future. The UK Stewardship Code 2020 has set new, progressive standards for what asset owners need to achieve, but currently they’re still a long way off meeting them. Failure to take the right corrective action now would be hugely damaging in the short and long term and could set the industry back on the momentum achieved to date. With just seven months to go before asset owners need to submit their reports, one of the key areas insurers need to focus efforts on is taking control of their stewardship and ESG responsibilities – not delegating these out to asset managers which many are currently doing. The insurance sector should take this as an opportunity to lead the charge in driving good stewardship across Financial Services.”
The new code introduces a range of new requirements for asset owners, including greater transparency on their management of conflicts and how closely they monitor the investment strategies and stewardship activities of the asset managers they engage. The economic and societal challenges experienced in the first half of 2020 has further heightened the importance of stewardship engagement around key areas of climate change, economic recovery and the diversity & inclusion agenda. Asset owners and asset managers alike will be pressed to demonstrate the outcomes they are working towards, and those they have achieved, in these areas in particular.
Asset managers are leading the FS industry on sustainability reporting
The report finds that insurers are currently very focused on climate change, sustainability and societal contribution (above other stewardship themes), but that a step change in stewardship activity and transparency is required to demonstrate how they hold the asset managers they engage with to account.
As for asset managers, their reporting was found to be generally improving, with environmental and governance themes emerging as their key stewardship priorities. The industry is demonstrating increasing levels of transparency on ESG reporting and appears to have a good awareness of its stewardship responsibilities, with many managers going beyond the regulatory requirements of the code.
Gareth Mee, Partner and UK Sustainable Finance Consulting Lead at EY, concluded: “The new UK Stewardship Code has helped set – and raise - the standards that are expected of institutional investors, and it’s a formula that has been followed by over 20 countries since it was first created in the UK. However, true engagement goes beyond regulation and codes; it’s about creating long term value. Better interactions between asset owners and managers is needed to strengthen trust and help shape how corporate reporting is redefined. Done well this will improve transparency and support safer investment of capital over the long term.
“This year has seen unprecedented economic and social challenges, so it’s vital, now more than ever, that asset owners step up to the plate and introduce tangible, evidence-based outcomes that deliver against an evolving society with ever changing risks.”