What are stewardship codes and what do they expect from institutional investors?

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AcadiFi · Accepted Answer

Stewardship codes set expectations for how institutional investors exercise their ownership responsibilities on behalf of clients and beneficiaries. The UK Stewardship Code 2020 (maintained by the FRC) is the most prominent and has influenced codes in Japan, Korea, Singapore, Malaysia, South Africa, and others. It applies to asset managers, asset owners, and service providers.

The UK Code comprises 12 Principles for asset managers and owners (purpose, governance, resources, incentives, conflicts, market-wide risks, stewardship policy review, client reporting, engagement, collaboration, escalation, exercising rights and responsibilities) and 6 Principles for service providers. It requires signatories to produce an annual Stewardship Report demonstrating how they applied the Principles with outcomes and examples.

Expectations include: integrating stewardship into investment processes, engaging with investees on material ESG issues, escalating when engagement fails (e.g., voting against directors, co-filing shareholder resolutions), collaborating with peers where appropriate, exercising voting rights thoughtfully, and reporting transparently to clients.

For a fictional asset manager like Teagarden Asset Management with 180 billion AUM, the annual Stewardship Report might include: 412 engagements with 218 companies on climate, board composition, and executive pay; 48 escalation cases (voting against 18 chairs, co-filing 7 resolutions); 12,400 votes cast at AGMs with rationales on contentious items; and outcomes such as a major oil firm adopting a science-based target following multi-year engagement.

For CFA candidates, stewardship is the mirror image of governance: governance is what companies do, stewardship is what owners expect. Together they close the accountability loop. Expect more stewardship codes globally and increasing scrutiny of stewardship quality from beneficiaries, trustees, and regulators.

What are stewardship codes and what do they expect from institutional investors?

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