As providers of capital, asset owners – pension funds, insurance companies, investment trusts and other investment vehicles – set the tone for stewardship and can play an important role in influencing the behaviour of investment managers and companies, whether it’s in the way companies manage risk, the way they remunerate their employees or how they vote on key resolutions.
Stewardship codes worldwide play an important role in influencing company behaviour. The Principles for Responsible Investment (PRI) recently welcomed the launch of Australia’s first compulsory asset manager stewardship code for members of the Financial Services Council (FSC).
The Internal Governance and Asset Stewardship Standard, which will be mandatory for all of the FSC’s funds manager members, formalises a code of practice on how they should meet obligations for transparency in their internal governance and stewardship practices. This includes rules for the disclosure of voting policies and engagement with investee companies on material environmental, social and governance (ESG) issues.
The development of an Australian stewardship code was one of several recommendations put forward by the PRI in its Australia roadmap in December 2016 to enhance investment industry policy and practice on responsible investment and bring these into line with global best practice.
In making this recommendation, we envisaged a total industry approach that included both asset owners and investment managers, so we are pleased to hear the Australian Council of Superannuation Investors (ACSI) is looking at the development of a stewardship code for asset owners.
Australia can then join a long list of countries that have already developed stewardship codes in recent years, including the UK, Italy, Denmark, Switzerland, the Netherlands, the European Union, the US, Canada, Japan, Hong Kong, Philippines, South Korea, Malaysia, Taiwan, Thailand, Brazil and Singapore.
For many countries, stewardship codes can help foster sustainable, long-term growth and attract foreign investors which feel that stewardship codes can help ensure better corporate governance.
While Europe and Asia have been steaming ahead on stewardship codes, however, the US has been slow to look at this issue. But progress is being made.
Some of the largest asset owners in the US including the California State Teachers’ Retirement System (CalSTRS), the Florida State Board of Administration and Washington State Investment Board, along with leading investment managers including BlackRock, Vanguard and State Street Global Advisors, have led on the Investor Stewardship Group (ISG).
This collective of some of the largest US-based asset owners and managers has articulated a set of fundamental stewardship responsibilities for institutional investors and has released a corporate governance framework that articulates six principles it considers fundamental for US-listed companies in order to improve governance practices in US publicly traded companies.
Codes improve company ESG risk management
In late 2016, the PRI undertook some research to look at whether or not codes made a difference to long-term investing.
The research showed that companies in countries with mandatory, government-led, comprehensive ESG reporting requirements have, on average, a 33 per cent better MSCI ESG rating than those in countries without. The score indicates better ESG risk-management practices relative to risk exposure.
In addition to codes, globally we are seeing more and more regulation to support long-term responsible investment coupled with recommendations for additional disclosure from the FSB taskforce on climate-related financial disclosures and the draft recommendations from the High-level Expert Group on Sustainable Finance on financing a sustainable European economy.
Both voluntary and mandatory policy recommendations are coming together to create a perfect opportunity for us to take responsible investment into the mainstream where it belongs.
As a minimum the PRI believes that asset owners and investment managers should be effective stewards of the assets they hold for their beneficiaries.
Asset owners should appoint, select and monitor asset managers on their ability to align stewardship activities with their investment beliefs, policies and guidelines, and the PRI will continue to work with its asset owner signatories to support them in this goal.
Fiona Reynolds is the managing director of PRI.