There is and always has been the risk that the Statement of Investment Principles is a boiler plate document, taken off an adviser’s shelf with, perhaps, a tweak to its commentary around stewardship based on some fairly generic statement provided by the asset manager(s).
Although ESG policy has been a required disclosure in the SIP since the 1999 Investment Regulations came into force (requirements which were updated and modernised in 2005), one has to wonder whether this disclosure of policy has done as much as might have been hoped to drive forward an effective stewardship agenda.
Trustees are now facing a new disclosure requirement and, being rather more practical than theoretical, it may well expose weaknesses in how policies have been drafted and/or the extent to which trustees actually monitor the implementation of those policies.
When defined benefit schemes publish their accounts from October 2020, they will have to provide details of how, and the extent to which, the SIP has been followed during the year in relation to matters of stewardship. For schemes offering defined contribution benefits, this requirement extends beyond voting and engagement, yet it is still likely to be the stewardship aspects that will lead to the most head scratching.
Asset owners are, in the main, trying to do more on stewardship, but have often struggled. Stewardship is something they largely have to delegate to their fund managers, but in most cases they will not have really delved into their fund manager’s stewardship credentials when they appointed them. Historically, active fund management appointments were made far more on the basis of perceived stock selection ability than with any critical examination of stewardship capabilities.
Trustees and their advisers cannot wholly be to blame for the ‘stewardship gap’. Fund managers themselves are still trying to grapple with how to be effective stewards of assets on behalf of their clients.
Most will say that they put stewardship high on their agenda and excel at it, but in reality it can be difficult to tell whether they are doing more than paying lip service. Increasingly, active fund managers seek to incorporate engagement activities into their fund management processes; however, while messaging on the importance of this may be coming from the top of these organisations, it may take a long time to change the behaviour and beliefs of the fund managers and analysts responsible for the interaction with companies.
Most equity managers now provide comprehensive disclosures on voting activities, but lists of votes cast (for, against and abstentions) are only a small part of the picture in seeking to understand the effectiveness of actions in enacting an engagement policy.
Active fund managers choosing to retain, rather than sell, a security will usually prefer to support management when it comes to a vote, and may be working hard to influence decisions ahead of a matter being put to the vote.
But this is where engagement effectiveness becomes particularly challenging to understand. Disclosures around company engagement may be limited to some high level statistics on numbers of meetings that tell the user very little and one or two case studies, where it is hard to ascertain whether outcomes really have anything to do with the fund manager’s actions. Of course that’s presuming that one’s fund manager provides engagement data for the period of your accounts in the timescales needed at all!
So taking all this into consideration, it is perhaps no surprise that many trustees have been trying to get their accounts signed off before 1 October, where possible. While this may buy time for some, we still need to face the challenge ultimately. And this is likely to mean we need to push fund managers to improve their reporting, challenge them on the extent to which engagement is an integral part of what they do and revisit our SIPs, to ensure they really do reflect our policies.
