Sign up to Stewardship Code or lose our business, Scottish Widows tells managers

Pension giant gives managers until 2024 to sign up to UK stewardship code as FRC report shows initiative's impact on investor practices.

Scottish Widows

Pensions giant Scottish Widows has given asset managers until 2024 to sign up to the UK’s Stewardship Code or local equivalents, warning that it will end its relationships with managers who do not comply.

More than three-quarters of the pensions and savings provider’s £190 billion in assets are currently managed by firms who are signed up to the code, with membership of the code a requirement for any new managers.

Maria Nazarova-Doyle, head of pension investments and responsible investments at Scottish Widows, part of Lloyds Banking Group, said: “We expect those who want to continue to work with us to sign up by 2024, and if they are not, we will unwind our exposure to them over time in line with contractual arrangements.” She said that the end goal was for all of Scottish Widows’ assets to be managed by signatories “so that we know we can expect a certain level of stewardship quality that’s independently assessed by [regulators]”.

The Stewardship Code is a voluntary standard for stewardship reporting that is regulated by the UK Financial Reporting Council (FRC). It was significantly strengthened in 2019 and the FRC has strict standards for membership – a third of applicants were rejected in the October 2021 application round. Scottish Widows itself became a member last year.

The ultimatum came as Scottish Widows published its stewardship report for 2021. Among the highlights were a commitment to increase engagement on biodiversity, including participation in collective engagement initiatives. Nazarova-Doyle said the firm had expressed its interest in joining Nature Action 100, the biodiversity equivalent to CA100+, of which it is a member.

The report also identified issues with voting on two proposals, on employee board representation and plastic pollution at Amazon, where two of its main managers – State Street and Abrdn – voted in favour, while the other two – Schroders and BlackRock – voted against. Nazarova-Doyle said that manager misalignment had “always been a concern, but given a large proportion of our investments are in pooled funds, we often don’t have a mechanism to direct votes”.

Scottish Widows has been active in a number of government stewardship initiatives, including the Taskforce on Occupational Pension Scheme Voting Implementation and the Occupational Pensions Stewardship Council.

Commenting on Scottish Widows’ work with the latter, Nazarova-Doyle said she “was pleased to note that asset managers were actually quite open to changes in the approach to client voting in pooled funds”. She also noted that owners and managers must be clear on what they need in order to achieve positive collaboration. A report published at the end of last week by the Investment Association and PLSA set out a number of recommendations to improve asset owner-manager relations on stewardship issues.

The FRC also published a report today (5 July) setting out the impacts of the revised Stewardship Code on stewardship practices in the UK investment industry.

Three-quarters of the institutions consulted for the report said the code had improved the quality of their engagement. Asset owner respondents said it had allowed them to better scrutinise asset manager stewardship activities and ask for better reporting.

Every asset manager said a key driver for signing up to the code was market expectations or client requirements. One large UK-based asset manager noted that every RFP they had received over the past year had asked about Stewardship Code membership. The report said that non-UK managers in particular considered membership to be a market expectation.