The definition of stewardship proposed by the UK’s Financial Reporting Council (FRC) conflicts with asset managers’ and asset owners’ fiduciary duty, according to the country’s asset management trade body.

The Investment Association (IA) said the way the FRC defined stewardship in its updated Stewardship Code would “hinder rather than promote the development of an effective market for stewardship”.

The IA suggested that with “careful redrafting” this and a few other shortcomings could be rectified to allow the code to deliver on expectations.

In the draft 2019 stewardship code, stewardship is defined as “the responsible allocation and management of capital across the institutional investment community, to create sustainable value for beneficiaries, the economy and society”.

The IA has suggested the definition be reworded to state that “stewardship involves the responsible allocation and active oversight of assets by different actors across the investment chain to generate sustainable value for beneficiaries. Effective stewardship should lead to long-term benefits for society and the economy.”

Sustainable value meant sustainable over relevant time horizons for beneficiaries, which were both short and long term, the IA said.

The association said this definition respected asset owners’ and asset managers’ fiduciary duty but also recognised “the interdependence between good stewardship and benefits to society and the economy over the long term”.

Index investing and stewardship

The association also argued that the draft code was biased towards active management.

“It assumes that good stewardship can only be achieved by active management, when in fact stewardship forms an essential component of both index and active management strategies,” it said. 

The draft code did not place enough emphasis on investors communicating the impact of their stewardship – as opposed to policies and processes – and certain provisions “conflated” the roles and responsibilities of asset managers and asset owners, the IA said.

“This may deter asset owners from becoming signatories to the code,” it added.

However, the association welcomed the overall direction of the changes, including the intention to set more demanding expectations on asset owners, its extension to cover more asset classes, and the aim to explicitly reference environmental, social and corporate governance factors.

Andrew Ninian, director of corporate governance at the IA, said: “Unfortunately, the implementation of the new code falls short on several key areas that are crucial to building a better stewardship market.

“If these concerns are not addressed, then they will hamper the development of a stewardship market that delivers for savers and investors as well as for the wider economy.”

Asset owner ‘resource’ concerns

The UK’s pension fund trade body said it supported the general shift in approach in the proposed code and the move to pitch it at “a more stretching level”, but warned that it could deter asset owners from becoming signatories.

The Pensions and Lifetime Savings Association suggested this would be because of concerns about “the resource implications of full compliance” rather than a lack of support for and application of the existing code’s provisions.

“We believe that a way should be found to encourage asset owners to express their support for, and commitment to, the aims of the Stewardship Code which also allows for the resource constraints of many schemes and acknowledges that schemes often delegate activity on stewardship issues to their managers,” it said.

The FRC, which oversees the Stewardship Code, is due to be replaced by a new body called the Audit, Reporting and Governance Authority.

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