INVESTING WITH PURPOSE - Investment Association
INVESTINGWITH PURPOSE:placing stewardship at the heartof sustainable growthNovember 2020
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ASSET MANAGEMENT TASKFORCE CONTENTSCONTENTSFOREWORDS4EXECUTIVE SUMMARY6SUMMARY OF RECOMMENDATIONSINTRODUCTION11151. WHAT IS STEWARDSHIP AND WHY IS IT IMPORTANT?17 elivering long-term value to clients and beneficiaries and in aggregate to the economy,Dthe environment, and society 19 What is the role of different market participants to deliver stewardship? 19Responsible allocation of capital 20Responsible management and oversight of capital 21Limitations of stewardship 22 Investors’ role in promoting well-functioning markets and addressing systemic riskssuch as climate change 23Investors role in the Covid-19 crisis and post-Covid recovery 242. HOW DOES STEWARDSHIP WORK IN PRACTICE?25S tewardship in Listed Equities 25 Stewardship in Fixed Income 28 Corporate Debt 28 Green bonds 31 Sovereign Debt 32 Stewardship in Real Estate and Infrastructure 33 Stewardship in Private Markets 363. RECOMMENDATIONS FOR STRENGTHENING STEWARDSHIP IN THE UK38S tewardship behaviours 39 Culture and Governance 39 Stewardship in different asset classes 40 Potential Future Workstreams 41 Private companies’ role in society and market integrity 42 Requisitioning resolutions 43 Setting expectations of companies in response to Covid-19 – outlining how investorswill uphold them through stewardship 44 Reporting on long-term sustainable value 46 Corporate Governance Code - Comply or Explain regime 49 Role of board directors in promoting and responding to good stewardship 50 Stewardship for clients and savers 51 Strengthening the relationship between asset owners and investment managers 51 Engagement with clients and savers 52 Economy wide approach to stewardship 55 System wide approach to stewardship 55 Role of other service providers to promoting good stewardship 57CONCLUSION59WITH THANKS TO:ENDNOTES60613
THE INVESTMENT ASSOCIATIONFOREWORDSFOREWORD BY JOHN GLEN MP, ECONOMIC SECRETARY TO THE TREASURYFor the past three years I have had the pleasure ofchairing the Asset Management Taskforce, whichbrings together the Government, senior representativesfrom the asset management industry, regulators andother key stakeholders. Stewardship, sustainability andresponsible investment have long been at the top ofmy agenda for this group, and investment by the assetmanagement industry will be important in buildingback not only better, but greener. I therefore welcomethis report from the Taskforce’s Stewardship andStakeholder Working Groups.As well as being a global centre of asset managementexcellence, the UK is a world leader in stewardshipstandards. This is exemplified through the FinancialReporting Council’s internationally respected UKStewardship Code. I am delighted that this report seeksto build on that existing leadership, starting with anendorsement of the UK Stewardship Code, and therebyaims to accelerate its wider adoption across the assetmanagement sector and the broader investment chain.The UK was the first major economy to legislate toend our contribution to climate change by 2050. Theasset management industry will have a key role toplay in channeling investment into companies andtechnologies that will enable that transition. As publicinterest in sustainability and responsible investmentcontinues to grow, there have been record inflows intofunds that invest according to environmental, social4and governance principles. It is clear that the assetmanagement industry’s responsibilities as stewardsof capital and the need to fully consider the impacton society and the environment as part of investmentdecisions will only increase further. That is why theUK will become the first country in the world to makedisclosures aligned with the Task Force on Climaterelated Financial Disclosures (TCFD) mandatory acrossthe economy.I welcome the detailed analysis contained in thisreport, which outlines many of the tools alreadyavailable to asset managers which enable them toact on behalf of savers and hold investee companiesto account. This set of clear recommendations, whichapply across the investment chain, will further enhancethe UK’s stewardship regime, and aims to ensure thatasset managers are focused on delivering long-term,sustainable benefits for investors, the economy, theenvironment and society.I would like to thank the many people involved indeveloping this report, in particular Keith Skeoch andCatherine Howarth for expertly guiding the Stewardshipand Stakeholder Working Groups and to the InvestmentAssociation for providing the secretarial support.
ASSET MANAGEMENT TASKFORCE FOREWORDSFOREWORD BY KEITH SKEOCH, CHAIR AND CHAIR OF THE STEWARDSHIP WORKINGGROUP AND CATHERINE HOWARTH, CHAIR OF THE STAKEHOLDER WORKING GROUPInvestment is a critical component of how we shape oureconomic future and will have a profound influence onthe pace, durability and quality of the recovery from theCovid crisis. Turning savings into productive investmentsis one of the defining characteristics of a moderneconomy, creating the jobs and wealth that are neededfor a prosperous society. The investment industry playsa pivotal role in this – aggregating the capital providedby savers and allocating it to investment opportunitiesthat generate long-term value.Our task was to draw together a set ofrecommendations to promote and facilitate the higheststandards of stewardship in the United Kingdomwhilst strengthening the UK’s reputation as a globalcentre of excellence. We set out twenty detailedrecommendations designed to directly tackle thoseissues that could strengthen stewardship in the UK.The recommendations are arranged in three pillars tosupport stewardship throughout the investment chain:Institutional investors’ ability to direct where capitalis allocated and to monitor how it is used by corporatemanagement teams gives them great influence in oureconomies. That influence can be used to protect andenhance not just the financial value of assets but thequality of life of millions of people who entrust theirsavings and pensions to professional investors. Byacting as responsible stewards of capital, insistingthat companies build wealth whilst protecting thepublic interest, whether by reducing carbon emissions,acting as decent employers, or operating with integritytowards consumers and suppliers, institutionalinvestors can serve their own clients and beneficiariesmore fully. Stewardship for clients and saversThe focus on stewardship – the responsible allocation,management and oversight of capital on behalf ofsavers – has come to prominence over the last thirtyyears and is a critical component of an efficientinvestment environment. The UK has led the way inestablishing good practice; from the creation of theInstitutional Shareholder Committee, to the Walkerand Kay Reviews that culminated in the creation of theworld’s first Stewardship Code in 2010. Stewardshipneeds to adapt and evolve to meet society’s needs andimprove the functioning of the investment system. Thisevolution cannot be aimed only at the here and now. Itrequires forward thinking to consider what society willneed and demand in the future. Stewardship behaviors Economy wide approach to stewardshipTaken together our recommendations will help putstewardship at the heart of the investment decisionmaking process and play a role in helping the UK buildback better.This Report is the product of collaborative engagementthroughout the value chain. Our two workinggroups included representatives from investmentmanagement firms, pension funds, company directorsand investment advisors as well as the FCA, FRC, BEIS,DWP, TPR and HMT, who all provided valuable input andcomment. We are deeply grateful to Andrew Ninianand Sarah Woodfield at the Investment Associationfor their energy and enthusiasm in providing criticalsecretarial support and ensuring the review wascompleted despite the Covid crisis. We were ablyassisted by Rachel Lord as deputy chair of theStewardship Working Group and Helen Dean as deputychair of the Stakeholder Group. Finally, we are gratefulto the Economic Secretary to the Treasury, John GlenMP, for commissioning us to deliver this report and forhis personal conviction about the power and value ofinvestor stewardship.5
THE INVESTMENT ASSOCIATIONEXECUTIVE SUMMARYLAST YEAR, JOHN GLEN MP, THE ECONOMIC SECRETARY TO THE TREASURYAND CHAIR OF THE ASSET MANAGEMENT TASKFORCE ASKED THE TASKFORCETO ESTABLISH A STEWARDSHIP WORKING GROUP AND STAKEHOLDER WORKINGGROUP TO MAKE PROPOSALS FOR HOW STEWARDSHIP AND RESPONSIBLEINVESTMENT COULD BE STRENGTHENED IN THE UK. THIS REPORT SETS OUTRECOMMENDATIONS TO IMPROVE STEWARDSHIP AND ENSURE THAT THE UKMAINTAINS AND ENHANCES ITS POSITION AS A CENTRE FOR EXCELLENCE INSTEWARDSHIP GLOBALLY. THE RECOMMENDATIONS ARE IN THREE PILLARS,WHICH TOGETHER STRENGTHEN STEWARDSHIP IN THE UK:PILLAR 1:PILLAR 2:PILLAR 3:STEWARDSHIPBEHAVIOURSSTEWARDSHIP FORCLIENTS AND SAVERSPRACTICAL STEPSFOR STRENGTHENINGHOW STEWARDSHIPWORKS IN PRACTICEACROSS THEFULL RANGE OFINVESTMENTS.DELIVERING ONTHE PURPOSE OFTHE INDUSTRYTO GENERATESUSTAINABLE VALUEAND ACHIEVE CLIENTS’INVESTMENT GOALS.ECONOMY WIDEAPPROACH TOSTEWARDSHIPThe investment management industry plays a majorrole in the economy, helping millions of individualsand families to achieve their life goals by helping themgrow and receive an income from their investments,including through workplace pensions. The investmentindustry’s purpose is to generate sustainable valueand meet client’s investment goals. These are usuallyfinancial, for instance having enough money to live6ENSURING THECOLLECTIVERESPONSIBILITYOF MARKETPARTICIPANTS ANDSTAKEHOLDERS.on in retirement, but can also include non-financialelements, such as to invest in companies, governmentsor projects that have social or environmental benefitsor that “do no harm”. To achieve these objectives,investment managers help to allocate capital acrossthe economy, putting it to work where it can be mostproductive across a range of different assets. Butinvestment shouldn’t stop there. To create long-term
ASSET MANAGEMENT TASKFORCE EXECUTIVE SUMMARYvalue for clients, investment managers should overseeand manage the assets they invest in to encourage,develop and support behaviour that will lead tosustainable returns. Collectively, this work of allocating,overseeing and managing capital falls under theumbrella of ‘stewardship’.The investment and stewardship landscape haschanged significantly over the last decade and thischange has only accelerated in recent years, forinstance with the rise of ‘ESG investing’ and significantchanges in capital allocation away from listed equities.At the same time, we have seen an increased focus onthe roles and responsibilities of investors as stewards.As broader societal trends, such as digitisation, haveconnected savers with their investments; the role ofthe investor has become subject to more visible publicscrutiny. We have seen deeper scrutiny of stewardshipresponsibilities in the wake of the 2008 financial crisisand in response to a number of high-profile corporatefailures. Regulators and other stakeholders haverecognised the important role that stewardship canplay in promoting well-functioning markets and in turnincreased their expectations of investors living up totheir stewardship responsibilities.Investors have continued to evolve their approachto stewardship in response to new challenges, suchas the coronavirus pandemic and the risks posed byclimate change; but there is increasing recognitionthat they could go further and that a wider range ofmarket participants need to recognise their role instewardship. Investors need to make the most of theirrights and responsibilities to promote long-term valueacross the economy.Following a wave of regulatory interventions focusedon enhancing transparency and accountability ofstewardship practices, the industry must now stepforward to meet the challenge of deepening andstrengthening the role of stewardship in the UK. Thisreport, produced by two dedicated Working Groupsfor the UK’s Asset Management Taskforce, sets outa blueprint for a truly economy wide approach tostewardship to ensure that investment supportssustainable value creation, not just for savers butalso for the economy, environment and society. Thisblueprint is formed by 20 recommendations underthree key pillars: Stewardship behaviours; Stewardshipfor clients and savers; and Economy wide approach tostewardship. The investment industry is committed tocollaborating with a wide range of market participantsand stakeholders to deliver on these recommendations.The Working Groups found themselves developing andfinalising these recommendations amidst a pandemicthat put the purpose of the industry to the test. Theindustry has been challenged to show stewardshipin action – the role that the industry plays in seeingthrough market volatility and protecting and preservingsustainable value for its clients, the wider economy,environment and society is even more important nowthan ever.“Stewardship is the responsibleallocation, management and oversightof capital to create long-term valuefor clients and beneficiaries leading tosustainable benefits for the economy,the environment and society”(FRC, UK STEWARDSHIP CODE, 2020)7
THE INVESTMENT ASSOCIATIONPILLAR 1:STEWARDSHIP BEHAVIOURSExpectations of investorsThis report calls for a step change in the industry’sapproach to the culture, governance and incentivisationof stewardship. We ask the industry to redouble theirefforts to become signatories to the UK StewardshipCode and for the Investment Association (IA) to supportits members in this endeavour. We also urge assetowners to redouble their efforts as stewards; we wantto see a significant increase in the number of assetowner signatories, across both the public and privatesectors. Stewardship and ESG considerations shouldbe fully integrated into the investment process, acrossand within different products and investment strategies;this systematic approach is essential to ensuring thatstewardship is at the heart of the investment process.Historically, stewardship and corporate governancehave been focused on voting and engagement in listedequities. This narrow focus no longer meets the needsof clients who expect their managers to steward theirassets responsibly across the full range of investmentsecurities. Given the increasing prominence of debtboth in asset owners’ strategic asset allocation, and oncompany balance sheets, investors and corporates mustfacilitate a culture of engagement and collaborationto enhance sustainable value in fixed income. Werecommend that bondholders make full use of therights and responsibilities currently available to them.The nascent state of bondholder stewardship is relatedin part to the limited rights that come with ownershipof debt securities to effectively hold management ofinvestee companies to account. As stewardship in fixedincome develops, it will be important to have a debateabout the appropriateness of existing bondholder rightsto hold company management to account. In a similarvein, we also ask for stewardship best practice to evolvein private markets.Investors don’t always make the most of the toolsavailable to escalate concerns with companymanagement. We propose that investors should userequisitioned resolutions more proactively as anescalation tool and develop robust model resolutionsthat can be applied across a range of different sectorsto escalate critical shareholder concerns. The industryshould test the use of model resolutions on climatechange, given the urgency with which companies mustchange their approach to responding to this critical risk.Expectations of companiesWe also set out a range of parallel expectations ofcompanies to support effective stewardship outcomes.Companies should facilitate engagement at theexecutive team and board level for bond and equity8holders and ensure this engagement is both strategicand long-term in nature. They should also informinvestors about the key drivers of long-term riskand value creation, so that investors can effectivelyincorporate these drivers into their investmentprocess and support companies to address them intheir engagement. This is even more important as weconsider the long-term sustainability of companies inlight of the coronavirus pandemic. Companies that areseeking additional capital, either through new equity orbonds, need to demonstrate how they are transitioningtheir business model to a more sustainable footing.Key to this is the development of a consistent andcomparable global approach to reporting on a widerrange of sustainability information. We endorse effortstowards the global harmonisation and coordinationof sustainability reporting standards. We welcomethe recent statement of intent to do so by the fivereporting framework standard setting institutions andthe statements of support from the UK Governmentand regulators for the development of internationallyagreed standardsi. Pending this harmonisation, it iscritical that issuers coalesce around a core set ofreporting standards to support better comparabilityof sustainability factors. The UK asset managementindustry supports the early adoption of TCFD by investeecompanies and the use of other reporting standards,such as SASB, as a stepping stone until an internationalreporting standard is developed.We also recommend that Government should advancea legislative underpin, requiring both public andlarge private companies to make TCFD disclosures,recognising the significant contribution that largeprivate companies will make to the net zero carbontransition. We are encouraged by the commitmentsto mandatory TCFD reporting across the investmentchain by 2025, as set out by the UK’s Joint-GovernmentRegulator TCFD Taskforceii.We also call for better quality explanations against theprovisions of the UK Corporate Governance Code anda review of the quality of the application of the WatesPrinciples and implementation of their Director Dutiesby large private companies.Board directors, responsible for stewarding investors’capital, must be at the table in conversations aboutdeveloping an economy wide approach to stewardship.We recommend that all board directors become betterengaged in the stewardship process. We propose theFinancial Reporting Council (FRC) develops tools andresources to support directors to better understandinvestors’ evolving approach to stewardship in light of theUK Stewardship Code.
ASSET MANAGEMENT TASKFORCE EXECUTIVE SUMMARYPILLAR 2:STEWARDSHIP FOR CLIENTS AND SAVERSOur recommendations also challenge the investmentindustry to put the interests of clients and savers atthe heart of stewardship; supporting them to have atangible sense of ownership and engagement with theirinvestments. Investment managers must be proactiveabout their approach to understanding and respondingto clients’ stewardship priorities and demonstrate howthey are meeting the needs of savers.The relationship between asset owners and investmentmanagers sets the tone for sustainable value creationand aligning incentives right across the investmentchain. We endorse the commitment by the IA andPensions and Lifetime Savings Association (PLSA) toestablish a new working group exploring how to embeda focus on stewardship in this relationship. The projectmust give clarity to how a long-term focus can beachieved right through from selection to appointmentand the contractual relationship that underpins this(including the investment mandate) and ongoingoversight and performance assessments.As pension scheme members’ interest in thesustainability of their investments increases, it isessential for funds to engage them on the role ofstewardship in delivering sustainable value and inserving their best interests. We therefore call for UKpension schemes to be required to explain how theirstewardship policies and activities are in members’ bestinterests. While some
instance with the rise of ‘ESG investing’ and significant changes in capital allocation away from listed equities. At the same time, we have seen an increased focus on the roles and responsibilities of investors as stewards. As broader societal trends, such as digitisation, have connected savers with their investments; the role of
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3.2 Investing in adopting and implementing accessibility standards 22 3.3 Investing in a disability-inclusive procurement approach 24 3.4 Investing in development and employment of access audits 26 Chapter 4: Drivers for and added value of investing in accessibility 29 4.1 Demographic factors driving the need for investing in accessibility 30
1:30 p.m. - 2:30 p.m. Breakout Session One Digital Finance/Cryptos, Fixed Income Investing, The Power of Business Culture 2:45 p.m. - 3:45 p.m. Breakout Session Two Private Equity Investing, Active & Passive Investing, ESG: Bug or Feature? 4 p.m. - 5 p.m. Breakout Session !ree Real Estate Investing, Quant Investing, A Deep Dive into Deep Value
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