What is the UK Stewardship Code 2020?
It’s an updated version of the code the Financial Reporting Council (FRC) published in 2010, in response to the global financial crisis. Its aim is to create long-term value for shareholders which will in turn lead to sustainable benefits for the economy, the environment and society. To achieve this, it sets out principles to help asset managers, service providers and companies engage with one another better; so companies are governed effectively and operate responsibly.
How is the 2020 Code different?
The big change is that we now have to submit an annual Stewardship Report that provides the evidence for how we’ve applied the Code this year. This will add more transparency and integrity to our stewardship process. But it won’t change how we engage with companies in the interest of our clients.
The FRC will then assess our report. If our stewardship process passes the test, we’ll keep our position as signatories to the Code. (It’s worth noting that Aberdeen Standard Investments is the actual signatory; but as a subsidiary, we’re covered by its stewardship policy. Adhering to the Code forms part of our investment approach.)
Any other differences?
The updated Code also reflects the growing emphasis on environmental and social (E&S) issues. According to Institutional Shareholder Services, 56% of all shareholder proposals in the US last year related to E&S.
In 2020 so far, we’ve seen 36 shareholder resolutions related to climate change and renewable energy. And resolutions relating to business practices have made up 35% of the total.
Why does stewardship matter to ASC?
In our view, good governance and stewardship are crucial. They help make sure companies are managed properly and operate responsibly in relation to their customers, employees, shareholders and the wider community.
We also believe companies that adopt best practices in corporate governance and risk management are more likely to deliver sustainable returns in the long term. And that includes the way they manage environmental and social risks. It’s why we’re strong supporters of the principles set out in the Code.
What does stewardship look like in practice?
We integrate stewardship into our quality sustainable growth investment approach in three ways:
1. We invest in companies that provide long-term structural growth opportunities. Alongside our Aberdeen Standard Investments colleagues, we meet with management to gain greater insights and understand a company’s key risks and culture. We also want to know that they operate with integrity, are accountable and adhere to international standards.
2. We vote on resolutions presented at company AGMs on behalf of our clients. We adopt a voting policy that is optimised for different jurisdictions to ensure we utilise these votes as effectively as possible. For example, In the UK we’ll vote against board appointments that don’t support the target of 30% female representation. However, this policy would have less effect in Europe where gender diversity is already higher and so the policy there is targeting 50%.
3. As part of Aberdeen Standard Investments, we advocate for positive change by engaging with company management and boards directly. In addition, our Governance and Central ESG Teams work alongside other investment managers, large investors and industry bodies to advocate for positive change.
For example, in 2019, we joined the Church of England Pensions Board, the Swedish Council on Ethics and a number of other investment managers to pressure mining companies to improve the safety record of their tailing dams by adopting international standards and agreeing to independent audits. This is not signing our name on a petition, but rather actively working with industry participants and engaging with companies.
How do I benefit from stewardship as your client?
It’s well documented that companies that go bankrupt have poor environmental and social scores in the years leading to the event. By truly understanding the risks of a company, including those related to ESG factors, we can aim to avoid investments that put your capital at unnecessary risk. Instead, we invest your money in companies that aim to generate a strong but sustainable return over the long term. Even if an investment idea scores highly from a financial and growth perspective, we still may not go ahead if governance is weak or the company scores poorly on environmental and societal practices. We believe it is important to be active stewards of our clients’ investments and advocate for positive change on their behalf.