FCA urged to step up on enforcement as ESG deemed material

Explicit reference to ESG in revised UK Stewardship Code a win for campaigners

Financial Conduct Authority

The Financial Conduct Authority should step up to enforce changes to the UK Stewardship Code, which deems environmental, social and governance factors financially material in a draft consultation published by the Financial Reporting Council on Wednesday.

All signatories to the code will be required to take ESG issues into account under the proposed changes, which are open to feedback until 27 March 2019. They would also be required to publish reports on their engagement with holding companies. For example, whether they had asked carbon-intensive companies to set emissions reduction targets and if the company had followed through.

The code is also being expanded beyond listed equity and further aligns the code to the UK Corporate Governance Code by requiring investors to report on their purpose, values and culture and how this meets their obligations to clients and beneficiaries.

UK asset managers were among the 170 members of the investment industry consulted in the preparation of the draft document.

FCA should regulate stewardship

Shareaction head of UK policy Fergus Moffatt said explicit reference to ESG was “extremely positive” and something the organisation had campaigned for years, but raised concerns about whether a successor regulator to the FRC would have the teeth to properly enforce changes outlined in the draft document.

In December, John Kingsman outlined concerns about the Financial Reporting Council’s ability to regulate on stewardship and other issues in an independent assessment of the Financial Reporting Council. The Kingsman Review recommended the creation of an independent regulator with statutory powers – the Audit, Reporting and Governance Authority (ARGA) – that would be accountable to MPs in the business, energy and industrial strategy (BEIS) committee.

However, Moffatt said Shareaction has concerns the new regulator will be too close to the interests of the UK investment industry in its role overseeing company reporting and audit to hold them to account effectively. “Given the FCA’s responsibility to supervise the conduct of asset management firms, carry out enforcement activities and achieve good consumer outcomes, it could feasibly play a more prominent role on stewardship.”

Overhaul puts UK investment industry at the forefront

Overall, Shareaction welcomed the latest revision to the code.

“Our ultimate goal is a regulatory structure that is clear on the purpose of stewardship, enshrines it as a central part of investors’ duties and holds investors to account where they fail to fulfil these duties,” Moffatt said.

Chair of the Financial Reporting Council Sir Win Bischoff said the updates recognise significant changes in stewardship since the code’s last revision in 2012. “We believe the changes proposed put it at the forefront of stewardship internationally.”​

Willis Owen head of personal investing Adrian Lowcock said the recognition ESG factors contribute to the long-term performance of businesses is a significant step for ESG campaigners. Lowcock said academic research and quantitative evidence has been increasingly supporting the view ESG factors add value. “ESG is slowly becoming core and mainstream for fund managers and indeed investors.”

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