The Financial Conduct Authority (FCA) has halted work on developing a set of metrics to reflect the impact of investor stewardship on a company’s sustainability strategies, referencing “significant challenges” in the process.
The industry body had been “working with industry leaders and other regulators” to decide how to develop indicators for the effectiveness of stewardship. However, according to an update on its ESG priorities, the FCA said that, in practice, isolating the effect of stewardship activities was challenging because there “are many factors that affect sustainability, including social and legal factors.”
Therefore, despite wanting to continue to see active investor stewardship that supports a market-led transition to a more sustainable future, the FCA had retired work on this metric.
The FCA also said that work to monitor enforcement and supervisory cases of financial crime, fraud, and mis-selling of ESG related products was also due to end. Since the introduction of this metric, regulation has evolved and the FCA has launched its Sustainability Disclosure Requirements (SDR), which identify “a more structured basis” for classifying ESG- related products. “We will therefore retire this metric and focus on the implementation and supervision of the SDR regime”, they concluded.
On the halt to work on stewardship effectiveness metrics, Louisiana Salge, head of sustainability at EQ Investors, agreed it’s hard to attribute company progress on E, S and G factors to investor stewardship alone. While this can be attempted on a “case study” basis, showing the contribution of investor engagement to specific company progress, Salge said she could not envisage this working at a higher, economy-wide level.
However, “there are many other ways in which one can assess “‘fair value’ in the delivered stewardship by professional investors to their clients in the UK.”
“While this shifts the metric’s focus from outcomes to inputs, it would be valuable for the FCA to tackle the quality of stewardship activities in the UK. It is important to differentiate the ambition and quality, and thus related impact, of the stewardship practiced by asset managers as they vary immensely. This could include an assessment of voting behaviour (there is a working group underway aiming to standardise this data), stewardship code alignment and leaning on new disclosure from the coming FCA SDR deadlines. These disclosures can help shine light on the scale of resources dedicated to stewardship, the number of outcome-oriented engagements, the quality of escalation plans, and the type stewardship levers pulled.”
Meanwhile, Lindsey Stewart, director of stewardship research and policy at Morningstar Sustainalytics, commented: “’Whodunnit?’ is a challenging enough question to answer in murder mysteries. But it seems even Hercule Poirot couldn’t answer that question when it comes to investment stewardship. Here, it’s extremely difficult, sometimes impossible to draw a line between an investors stewardship activities and outcomes with a range of external influencing factors, of which investor influence is just one, and a limited one at that.
“The only thing an investor can conclusively prove is that they actually did something, which is why it’s so important that we crack the code on high quality engagement reporting. The forthcoming FRC Stewardship Code consultation will be vitally important in defining what’s possible and what’s expected in this regard.”
