Stewardship: the need to be agile

In terms of Stewardship, the invasion of Ukraine, amongst other things, has highlighted the need for firms in the investment management sector to be able to quickly adapt their Stewardship approach, decisions, and activities to rapidly emerging geo-political events.

Where these firms are, or are seeking to be, signatories to the Financial Reporting Council (FRC) Stewardship Code, not only do firms need to respond to significant and rapidly emerging global events in the running of their business but their response needs to be reflected in Stewardship reporting.

A test of agility for Stewardship and reporting.

While the Russian invasion of Ukraine in February will have required significant reaction in terms of portfolio management, investor relations, etc., it will also require firms to make changes across a range of practices underpinning all 12 Principles of the Stewardship Code.

For example, in terms of Principle 4 and the management of market-wide risks, alignment with the FRC Stewardship Code (Code) will likely require firms to demonstrate using case studies how the long-terms risks such as those associated with reliance on Russian oil and gas, or flour and sunflower oil from Ukraine are being managed.

Not only will firms have had to rapidly reassess and respond to new risks like these at the time, but for Stewardship reporting evidence must be collated from across the business to show how risk management practices link to the Stewardship outcomes achieved.

The Russian-Ukraine conflict will also challenge how well firms are able to quickly adapt the issues they prioritise (such as energy security, etc.) for engagement and escalation (as per Principles 9, 10 and 11 of the Code). Importantly, here firms will be expected to use their influence in ways beyond just exercising voting rights to drive outcomes that are in line with their Stewardship purpose.

In terms of reflecting the implications of the continuing conflict between Russia and Ukraine in annual Stewardship reports, firms looking to submit to the FRC at the end of September 2022 will need to clearly demonstrate how they have responded. It will be important to adequately address the issue, showing how the implications of the conflict are a specific issue for which they have targeted their engagements, escalations, and stakeholder collaboration activities.

Forward-looking and adaptable Stewardship

There will almost certainly be significant future global events that will require investment firms to adapt their Stewardship decisions, actions and reporting.

This requires firms to have forward-looking and adaptable Stewardship frameworks that allow them to respond to global events and maintain strong, consistent Stewardship.

To improve how nimble a Stewardship framework can be, there are a range of ways to improve a firm’s capabilities, for example:

• Undertake scenario analysis to assess the impact of potential global events on Stewardship ahead of time.
  
  
• Define and categorise the type and level of Stewardship response, tactics and strategies that will be deployed for the organisation in terms of the nature, scope and scale of significant global events.
  
  
• Put clear cut-off points and change windows into Stewardship reporting processes to control when new and emerging global events can be reflected in the annual report.
  
  
• Establish robust plans, processes, and communication channels to help drive consistency in the reactions by different teams in the face of fast-moving global events. Undertake careful mapping of the processes and controls relied upon to collate Stewardship case studies and evidence, identifying where these need to be more effective, efficient and adaptable.

Conclusion

Quickly adapting Stewardship activities and processes throughout the organisation, and ensuring your Stewardship reporting reflects your firm’s latest position will continue to present challenges. Significant global, geo-political developments not only highlight the need to ensure a Stewardship framework is sufficiently agile but also the importance of making sure Stewardship reports provide evidence of how the firm has responded in activities and outcomes generated.

If you would like to discuss how you and your firm have responded to the significant geo-political risks of 2022, or how you plan to report on this, we would be delighted to speak with you. Please reach out to any of the authors of this blog or your normal Deloitte contact.