ESG investment issues permeate planned review of UK’s Stewardship Code

Environmental, social and governance factors rise up the agenda

The Financial Reporting Council, the UK watchdog, will issue a consultation on the Stewardship Code by mid-2018 in which it will seek input on environmental, social and governance (ESG) factors and responsible investment issues.

Once the current consultation on the Governance Code (launched today following the 25th anniversary of the Cadbury Code) is over, the FRC expects to launch a “detailed consultation on specific changes” to the Stewardship Code.

The FRC published today a consultation document for the Governance Code, of which half of it includes a chapter already “consulting on the direction of travel for reform of the Stewardship Code”, predominantly guided by ESG considerations.

The Governance Code consultation also seeks feedback on whether the United Nations’ Sustainable Development Goals (SDGs) should be considered either in the code or its guidance.

This reflects the findings of the report Growing A Culture of Social Impact Investing in the UK of the UK Treasury’s advisory group chaired by Allianz Global Investors Vice Chair, Elizabeth Corley.

Fergus Moffatt, Head of Public Policy at the UK Sustainable Investment and Finance Association (UKSIF), told RI that corporate reporting around social impact in the context of the SDGs is an area in which UKSIF will work with the FRC and the government “to ensure the new system goes even further to promote sustainable businesses.”

Moffatt added: “We are also pleased to see a review of the Stewardship Code and the opportunity to better align it with the new rules on investors’ fiduciary duties recently outlined by the Pensions Regulator.”

On the issue of workers on boards, the Governance Code consultation covers the government’s suggestion to ensure “the employee voice is heard in the boardroom”.

Such suggestion is the adoption on a complain-or-explain basis of one of the following three mechanisms for employee engagement: a director appointed from the workforce, a formal workforce advisory council or a designated non-executive director.

Prem Sikka, Professor of Accounting and Finance at the University of Sheffield, told RI that the Code fails to address the corporate abuses of the period in which the FRC has presided over, such as “widespread tax avoidance, fat-cattery, corruption, exploitation of customers and employees”.Sikka said: “The Code of the FRC, a self-appointed guardian of corporate governance, does not democratise corporations or give long-suffering stakeholders any enforceable rights to call directors to account. Simply asking directors to “explain” is not enough. The revised Code continues to promote the failed model of shareholder capitalism even though shareholders are focused on the short-term and only provide a small proportion of capital in major companies.”

In the initial consultation on the Stewardship Code, the FRC is asking whether it should more explicitly refer to the integration of ESG factors and broader social impact.

“We feel that the Stewardship Code should not only be relevant for ESG decision-making; however, we are interested in views about how it could be amended to refer more effectively to ESG factors an integration,” the FRC stated.

Similarly, as the FRC pondered that “some signatories consider themselves responsible investors, as opposed to responsible shareholders” it asks how the Stewardship Code could “take account of some investors’ wide view of responsible investment”.

The future consultation also will touch upon engagement related to executive pipeline diversity (asking whether it should be included as an explicit expectation of investor engagement) and climate change (asking whether the Code should request that investors give consideration to company performance and reporting on adapting to climate risk).

Referencing also the Association of Member Nominated Trustees’ Red Lines Voting initiative, it also seeks views on the issue of voting in pooled funds, asking whether it would appropriate for the Code to support disclosure of the approach to directed voting in such funds.

Bethan Livesey, Head of Policy at ShareAction, told RI that the FRC is showing its willingness to amend both Codes to promote trust and long-termism in business.

“The onus is now on the corporate and investment sectors to press the FRC to be ambitious in taking this agenda forward to build a sustainable UK economy,” Livesey said.