Research led by EY shows how UK’s top 30 investors prioritise environment and corporate governance, leaving behind areas such as audit, corporate reporting, trust, and reputation.
In its study, EY focused on understanding the key priorities of the top 30 UK asset owners and managers when investing in companies. Whilst assessing key areas of focus for investors, the multinational accounting firm ranked areas of stewardship based on investors’ risk considerations.
As the UK Stewardship Code has promoted a greater engagement between investors and businesses, EY’s report reveals there is still more to be done to ensure asset managers and owners increase the level of interaction and reporting on business issues.
Hywel Ball, EY’s UK Managing Partner of Assurance, said: “Trust in business needs all three elements of the financial ecosystem to be working effectively: stewardship, governance and reporting.”
He believes investors play a key role in defining priority areas whilst analysing investment risks: “Asset managers and asset owners have a vital role to play in setting the standards expected from the companies they invest in.
“While it’s encouraging to see more engagement on issues such as climate change, the research shows there’s a need for deeper dialogue between business, investors, and society on other important issues such as supply chains, purpose, and trust,” he added.
Stewardship, along with governance and reporting, was found to be a critical component in building greater trust in business.
For its study, EY examined material such as voting and engagement reports and Environmental, Social and Governance (ESG) reports whilst conducting formal interviews with institutional investors.
The firm looked at 25 priority areas of stewardship, such as succession planning, culture and values, competition, and climate change.
Ball believes engagement from asset owners and managers interferes with regulation and Codes such as the UK Stewardship, understanding it is the investors’ responsibility to change this ‘formula’.
He stated: “While the UK Stewardship Code has helped set the standards that are expected of investors, and it’s a formula that has been followed by over 20 countries since it was first created in the UK, proper engagement goes beyond regulation and Codes and we all have a responsibility to make this happen.”
Environment: a top priority
EY’s research reveals environment and climate change to be the highest area of priority for asset managers and owners. This is due to the potential risks in business disruption, such as a shifting demand for electric cars.
Investors wish to grasp how companies are assessing and managing their risks in response to climate change – from addressing companies’ carbon emissions, adapting to climate change, adapting to resource capacity, and preparing for physical climate risk.
ESG tools are used by investors to consider environmental considerations when making investment decisions, according to EY research.
Pensions funds are also now engaging on climate risks, with at least one linking the real value of its members’ retirement income to the state of the environment in which they will be retiring.
Corporate governance
In the study, corporate governance came second as an area of stewardship engagement. This included areas such as executive remuneration, director independence, leadership composition, risk oversight and succession planning.
Whilst remaining high in the ranking, corporate governance has significant disparities due to some variations in the level of engagement between asset owners and managers. The level of asset owners being way below the level of managers.
EY believes there is an opportunity for asset owners to increase level of interaction and better reveal expectations to investee companies.
Audit and assurance
The research indicates audit and assurance have a low stewardship score, due to recent high profile corporate and audit failures in the UK.
Following heightened regulatory, government and media scrutiny of audit, EY believes the figures will rise.
Ball commented: “As the ultimate beneficiaries of audit, institutional investors are likely to continue to come under greater pressure to demonstrate frequency, depth and effectiveness of their engagement around audit and assurance.
“A properly functioning audit market requires audit firms, audit committees, management and investors to all be playing their part,” he added.
Corporate reporting, trust and reputation
Corporate reporting, trust and reputation scored the lowest in EY’s research.
Greater regulatory and policy focus is also forecasted around some of these issues as part of the Financial Reporting Council’s Review into the Future of Corporate Reporting and the Brydon Independent Review into the Quality and Effectiveness of Audit.
EY believes investors can shape how corporate reporting is redefined to improve transparency and support the safe investment capital over the long term.
Ball stated: “Stewardship reporting is still evolving and we found significant variations in the reporting styles and approaches currently being used. While many investors relied on anonymised case studies, a small number provided a break-down of how often they were interacting with companies on priority issues.
“We think that a combination of these tools is needed in order to provide greater transparency and better insights about the interactions taking place between asset managers, asset owners and business.
“Public reporting is essential to providing transparency to the market, enabling greater accountability and trust in business.”