Financial Reporting Council: third of investment firms fail stewardship code

Tougher code aims to set high standards for investment firms, but some big names have failed to make the list.

Some of the biggest names in investment in the UK have failed in their attempts to sign up to a new stewardship code, designed to set the standards for how firms handling our investments need to act.

According to the Financial Reporting Council (FRC), which drew up the new code, 125 firms made the grade and have been approved as signatories to the code.

However, what’s perhaps more interesting is the collection of large names among the 64 businesses that were denied entry onto the list, given their size and importance in the investment market in this country.

What is the Stewardship Code?

The Financial Reporting Council (FRC) drew up a new, tougher code that essentially sets the standard for how investment firms need to behave if they are to do right by their individual investors while investing in a responsible way.

In other words, it’s less about making huge returns by plonking your money into assets in things like weapons and tobacco, and more about getting a good return while also protecting the planet and society as a whole.

As the FRC points out, the code doesn’t set out a way of managing investors’ money that has to be followed in order to provide effective stewardship.

Instead, the code is made up of ‘apply and explain’ principles ‒ basically, the asset managers have to be able to justify how the way they behave meets those core principles.

So for example, one of the principles is that the investment beliefs, strategy and culture of the investment firm create long-term value for clients and lead to sustainable benefits for the economy, the environment and society.

Others cover things like the way that firms will communicate with their investors, or that they will hold managers and service providers to account.

And it appears that some of the nation’s biggest investment names have failed to meet the exacting standards of the code, leading to inevitable questions about whether the decisions they are making on behalf of investors.

Managing our money

On the positive side, two-thirds of those who applied to join the list were successful, and between them they manage £20 trillion of assets.

That’s an enormous amount of investor money and includes names like Aviva Investors, Blackrock, Fidelity, HSBC, Investec and Vanguard.

The FRC said that successful firms are integrating stewardship and environmental, social and governance (ESG) in their decision-making.

It also highlighted strong reporting on underpinning governance activities. In other words, they can demonstrate how they are including ESG concerns in the way that they operate.

Obviously, this wasn’t the case across the board though, with the FRC pointing out that the firms who did not make the list commonly did not address all of the principles or provide evidence to support their approach.

It warned that they too often relied on policy statements, rather than actually backing those up with proof that they are behaving in a responsible way.

Among the names not on the list are Schroders ‒ the UK’s biggest standalone asset manager ‒ as well as JPMorgan.

Schroders has said that its failure to make the list was down to the format of its submission, rather than what was contained within it, and said it was confident it would be a signatory again soon.

The firms who failed will have future opportunities to apply to join the list, starting in October.

Holding investment firms to account

Obviously, it’s welcome that investment firms are having to prove themselves in order to gain plaudits like membership of the code, and it’s positive that they are being held to account over the way they behave.

But ultimately, these sorts of codes only really make a difference if individual investors take note of them, and include them in their considerations when deciding who to invest with.

We can all talk a good game about ESG, and about how investing responsibly is important, but actions speak louder than words.

Some of the nation’s biggest investment names have been excluded from the list precisely because they couldn’t back up their words with action, or at least prove that they have.

As individual investors, it’s up to us to show that these issues matter and back the businesses that can demonstrate that they are showing high standards of stewardship.