Overview:  ACSI policy paper, Towards Stronger Investment Stewardship

As part of its broader response to the Financial Services Royal Commission, The Australian Council of Superannuation Investors (ACSI) has released a policy paper outlining two proposals to strengthen investment stewardship in line with global best practice and in line with growing ESG expectations.

Key takeouts

Call for action to strengthen investment stewardship: Australian Council of Superannuation Investors (ACSI) has called on the incoming government, regulators and investors to commit to strengthen investment stewardship and to mandate the integration of environmental, social and governance (ESG) considerations into investment decision making.

Two proposals: ACSI is calling for two changes: 1) explicit regulatory recognition (by APRA) of the importance of ESG issues in the formulation of investment strategies; and 2) a review of the regulatory framework for stewardship (including consideration of: the appropriate minimum standards and reporting, the regulatory framework and a stewardship code for institutional investors).

Broader policy response to the Financial Services Royal Commission: The two proposals are part of ACSI's broader policy response to the financial services royal commission which is summarised briefly at the end of this post. 

The Australian Council of Superannuation Investors (ACSI) has released a third policy paper outlining two proposals to strengthen investment stewardship in line with global best practice and in line with growing ESG expectations. The proposals aim, ACSI says, 'to acknowledge the importance of environmental, social and governance (ESG) considerations to investment risk and returns and to strengthen investment stewardship by making it more consistent'. The proposals are part of ACSI's broader policy response to the Financial Services Royal Commission.

Proposals

Proposal 1: Integration of ESG considerations into APRA standards and guidance

Revision of APRA standards and guidance to explicitly recognise the importance of environmental, social and governance (ESG) issues in the formulation of investment strategies and a requirement for superannuation trustee boards to have access to capacity and competence on ESG issues.

ACSI's view is that ESG considerations have a material financial impact on investment value over the long term, and that this is insufficiently reflected in current APRA guidance or standards. Updating APRA's standards and guidance to integrate ESG considerations is appropriate, ACSI considers, because it would support stronger stewardship (the protection and enhancement of the long-term value of investments). It would also be an opportunity, ACSI suggests, to address confusion between ESG considerations and ethical investing (two different approaches) in current APRA guidance (SPG 530 Investment Governance).

The proposal is in line, ACSI writes, with the views expressed by Commissioner Hayne in the Financial Services Royal Commission's Final report. In addition, ACSI argues that strengthening APRA's guidance and standards as proposed, would align with global investment practice (eg the UK Financial Reporting Council's (FRC's) proposed changes to the UK's Stewardship Code to require signatories to integrate stewardship into their investment approach and demonstrate how they take material ESG issues into account when fulfilling their stewardship responsibilities) and bring Australia up to date with other developed markets. Finally, ACSI notes that it is an area that APRA has said it will consider enhancing, and ACSI calls on the regulator to consult on revisions as soon as possible.

[Note: APRA recently released the results of its review of 2013 reforms of the superannuation prudential framework and flagged areas for potential further enhancement. Among them were enhancements to SPS 530 Investment Governance including (among other things) reviewing and updating the guidance on consideration of environmental, social and governance (ESG) factors in formulating investment strategy. See: Governance News 01/05/2019]

Proposal 2: Review the regulatory framework for stewardship.

The review should consider appropriate minimum standards and reporting, the appropriate regulatory framework, and a stewardship code that applies to all institutional investors.

In Australia, ACSI developed the Australian Asset Owner Stewardship Code (Code) which investors may adopt on a voluntary basis (see: Governance News 18/05/2018). Separately, the Financial Services Council (FSC) also has a number of relevant standards that apply to FSC members (not the market more broadly). ACSI argues that the 'benefits of a stewardship code that applies to a more comprehensive array of stakeholders are tangible' eg ACSI considers that where asset managers are signatories to the UK Stewardship Code, they both better equipped to judge the compatibility of their manager's stewardship commitments with their own and better able to meet asset owners' expectations.

It is ACSI's view that a stewardship code that is applicable to all institutional investors should be introduced, within an appropriate regulatory framework. This could be undertaken, ACSI suggests, in coordination with relevant stakeholders such as APRA and the Financial Services Council (FSC), and as part of a broader consultation on the regulatory aspects of stewardship.

[Note: The recently completed 'root and branch' independent review of the Financial Reporting Council (FRC) led by Sir John Kingman (the Kingman Review) found, among other things, that 'The Stewardship Code, whilst a major and well-intentioned intervention, is not effective in practice' and that a 'fundamental shift in approach' is needed to ensure that the revised Code more clearly 'differentiates excellence in stewardship' with a focus on 'outcomes and effectiveness, not on policy statements'. The Review states that 'If this cannot be achieved, and the Code remains simply a driver of boilerplate reporting, serious consideration should be given to its abolition'. See: Governance News 16/01/2019]

Not onerous? The AFR quotes ACSI CEO Louise Davidson as stating that ACSI's proposed reforms are not onerous 'It's really about increasing transparency about stewardship activities, such as how you monitor assets and service providers, engaging with companies and proxy voting' and not about revealing investment secrets. 'We're really focused on the principles they [investors] use in their decision-making, and greater transparency about the issues that are important to them — for instance board composition, or remuneration' Ms Davidson added.

Context: ACSI's broader response to the Financial Services Royal Commission

The proposals put forward follow the release of two earlier policy papers: the first proposing four reforms to address corporate accountability (see: Governance News 01/05/2019) and the second aimed at strengthening corporate culture and diversity (see: Governance News 08/05/2019.)

Together, ACSI states, the proposals respond to issues identified by Financial Services Royal Commission. ACSI CEO Louise Davidson said, 'The momentum for change is strong following the Royal Commission. Australia's policy makers and regulators have a significant opportunity to improve regulatory settings in ways that are good for consumers and investors, good for sustainable business practices, and in line with growing demand for investment stewardship ESG integration.'

Snapshot: ACSI's proposed reforms in response to the Financial Services Royal Commission

Corporate Accountability: ACSI proposes four measures to enhance corporate accountability: a) requiring a binding shareholder vote on remuneration policy every 3 years; b) requiring disclosure of CEO pay ratios to shareholders; c) introducing annual director elections; and d) permitting non-binding (advisory) shareholder resolutions.

Culture and Diversity: ACSI proposes two measures to strengthen corporate culture and diversity: 1) all listed entities should be required to undertake regular cultural reviews and disclose the action taken; and 2) all listed entities should be required to set a time frame within which they will achieve board gender balance (40:40:20) and that if this is not achieved by 2025, regulatory intervention should occur .

Effective Stewardship: ACSI proposes two measures to strengthen effective stewardship: 1) Revise APRA's investment guidance to explicitly recognise the importance of ESG issues in the formulation of investment strategies; and 2) Review the regulatory framework for stewardship. The review should consider appropriate minimum standards and reporting, the appropriate regulatory framework, and a stewardship code that applies to all institutional investors.

[Sources: ACSI media release 08/05/2019; ACSI policy paper: Towards Stronger Investment Stewardship; [registration required] The AFR 07/05/2019; Money Management 08/05/2019]