Three FRC stewardship questions clients ask us again and again

It’s that time of year again… spring has sprung (in some places more than others), the end of the tax year has been and gone, and many of our clients are working full throttle on submissions to the FRC to obtain UK stewardship signatory status.

We have provided consultancy to a raft of asset managers regarding their UK stewardship submissions for this reporting period – and ahead of previous submissions – and we find a number of queries come up again and again.

For those in the final days of preparation, and for others looking ahead to the October submission date, we wanted to provide answers to three of the most common questions we get asked on stewardship submissions.

If you’d like to chat further about our tried and tested approach to stewardship submissions, get in touch here.

Q: How much time and resource should we be putting towards this?

A: Without wanting to cop out on this one, it really does depend. And there are some supplementary questions that could help an asset manager answer this. First, how much of your brand, business model and identity are defined by sustainability? If you are a business genuinely trying to build a reputation and investment capability centred on sustainability, then demonstration of your stewardship credentials are a baseline requirement, and the UK’s signatory status remains a litmus test of your commitment. In this scenario, we would suggest a significant amount of time and resource should be targeted towards applying for and securing your FRC accreditation in order to back up the claims you make in market around the importance of sustainability and your authority in the area.

If, on the other hand, you are applying for FRC signatory status because you feel you should, or as a ‘tick-the-box exercise’, then please don’t. In this situation, you could throw months and months’ worth of preparation from an internal team bolstered by support from external consultants and still not pass muster. Unless there is a genuine appetite and appreciation for stewardship and the value it brings to your clients within your organisation, then motives should be questioned, and serious consideration applied to whether you should submit or not.

Q: What matters more – the journey or the destination?

A: From what we have seen, reviewed, and discussed with our clients and networks, a key takeaway has been that the FRC are looking for evidence of your intention towards and evolution of stewardship. Even for those who believe they have achieved the ‘gold standard’ of stewardship (which is after all a subjective concept) in any given reporting period, the reality is the goalposts keep moving.

Revisions to the UK stewardship code were last made in 2019 and applicable from January 2020. Previous updates were made in 2012, just two years after the code’s launch in 2010. Given that the prominence of sustainable investing and the pace of change has built considerably over the past decade, we expect updates from the FRC to be more regular from now on.

While we do not know what subsequent revisions might have in store, one thing we expect to remain consistent is the emphasis placed on transparency and reflection. In our experience, the FRC recognises the world, our industry, and therefore none of its constituents, are perfect.

That is why they prize openness in the case studies and evidence shared, and a spirit of genuine improvement driven by lessons learned from those instances stewardship activities or outcomes fall short of stellar.

If asset managers can demonstrate:

how they try to formalise their approaches to stewardship, and why,

how they have documented/are documenting their processes,

how they follow these processes to the best of their ability/applicability; and

how they bake in reviews and subsequent bolstering of their governance frameworks and processes to improve them over time…

…this is imminently preferable to submitting a report that skimps on detail, infers process and rigour without evidencing it and sets the applicant up as a paragon of stewardship with nothing left to learn.

Q: How long/short should it be and does design matter?

A: Every conversation we have with clients about stewardship reporting eventually turns to this query. It usually stems from a dual concern around wanting to be thorough and detailed enough while ensuring the report doesn’t run the length of a small novel and remains digestible.

For different businesses length will vary. For a global asset manager with strategies across the full spectrum of asset classes and markets, the area they are required to cover is understandably broad and the FRC prefers to see case studies and examples representative of the profile of the business.

Meanwhile, smaller or more focused firms might find they can fulfil the required detail in less than half the length. We have seen reports ranging from 25 pages in length to a whopping 138 pages. And while we wouldn’t recommend the latter, we firmly believe that using narrative structure, layout and design devices to help the reader navigate the report and find the most pertinent information is what matters most.

Another trend we have noticed is that of some asset managers using their firmwide sustainability report as their stewardship submission – something we would definitely advise against.

But that’s a topic for another day…

Good luck to all those working towards the end of April deadline!