Investors struggle with new ESG regime

16 Sep 2021

Declining membership of the UK Stewardship Code highlights the challenges institutional investors face in complying to an ever-expanding world of ESG-related initiatives, says Andrew Holt.

The political will to protect savers from environmental, social and governance-related risks is creating a more complex regulatory regime for institutional investors and some are struggling to keep up.

The new ESG-orientated Stewardship Code is an example. The Financial Reporting Council (FRC) has listed the organisations who have signed up to the new code, with some big asset managers not making the cut.

The old code had 280 signatories, while only 189 applied to sign up to the newer, ESG friendly version. Yet around a third of applications were rejected meaning that only 125 pension schemes and asset managers are signatories.

But the reasons for not applying successfully, cites one asset manager, is to do with simply not satisfying the FRC’s submission format.

One asset owner who was a signatory to the old code for more than a decade, said its application to the new code was rejected due to the format rather than the substance of its submission.

Explaining why organisations failed to make the signatory list, the FRC said in a statement: “The organisations that did not make the list commonly did not address all the principles or sufficiently evidence their approach, instead relying too heavily on policy statements.

“Other areas of weakness included reporting on the approaches to review and assurance, and monitoring service providers. We would also like to see more focus on identifying areas for improvement.”     

Several big-hitting pension funds and asset owners appear on the list of signatories, such as Nest, the Church of England, Border to Coast and the Universities Superannuation Scheme.

Those who were rejected will not have a long wait to re-apply, as the next application deadline is the end of October. It will be interesting to see if the number of signatories jumps after this deadline.

High standards

The new code sets high stewardship standards for investors, comprising 12 ‘apply and explain’ principles for asset managers and asset owners, and a separate set of six principles for service providers.

The focus of the code has shifted over the years. When it was first published in 2010, it was about improving the quality and quantity of engagement between investors and companies.

The updated code has gone further, targeting the integration of ESG issues into the investment approach and decision-making process. The code applies to asset owners, asset managers and service providers.

The FRC said of the signatories that it: “Was pleased to see investors better integrating stewardship, and ESG factors into their investment decision-making, reporting on asset classes other than listed equity and identifying the outcomes of their efforts. There was also some strong reporting on underpinning governance activities.”

But this is not the only ESG-related initiative that has a bearing on asset owners and investors. There is also the Financial Conduct Authority (FCA) Enhancing Climate-Related Disclosures by Asset Managers, Life Insurers and FCA-Regulated Pension Providers consultation.

The key disclosures here cover two parts: entity-level disclosures and product, portfolio-level disclosures.

On entity-level disclosures firms will be required to publish annually an entity-level Task Force for Climate-Related Financial Disclosures (TCFD) report on how they take climate-related risks and opportunities into account in managing or administering investments on behalf of clients.

These disclosures must be made in a prominent place on the main website for the firm’s business and would cover the entity-level approach to all assets managed by a UK firm.

On product or portfolio-level disclosures, companies will be required to produce, annually, a baseline set of consistent, comparable disclosures in respect of their products and portfolios, including a core set of metrics.

Such disclosures would either be published in a TCFD product report in a prominent place on the main website for the firm’s business or be made upon request to certain eligible institutional clients.

Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Savings Association, welcomed the FCA’s proposals. “These are an important step in setting requirements for asset managers, life-insurers and FCA-regulated providers that will shortly be mandated to produce TCFD aligned disclosures,” he said.

Causing confusion

Yet the consultation follows hot on the heels of the Department for Work and Pensions (DWP) consultation for pensions funds to improve TCFD reporting. All of which is potentially a cause of confusion.

“The parallel activities and differing regulatory focuses have created some misalignment of timetables for the reporting of information,” warned Dabrowski.  

“We are concerned that different views on reporting metrics have been proposed across the two consultations,” added Dabrowski. “As schemes and investors generally have identified comparable and consistent data as a key issue, we would urge the FCA, The Pensions Regulator, and DWP to find a common set of expectations to ensure the whole of the investment chain is aligned, and can pull in the same direction.”

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