In the code or in the cold; the FRC sort ESB wheat from chaff

The Financial Reporting Council is authoritative on stewardship, as its website makes plain.

We regulate auditors, accountants and actuaries, and we set the UK’s Corporate Governance and Stewardship Codes. We promote transparency and integrity in business. Our work is aimed at investors and others who rely on company reports, audit and high-quality risk management.

So when it speaks, it merits attention and the FRC has spoken.

Unlike the majority of ESG reports, the FRC’s is not seeking inclusion but sorting wheat from the chaff. Its value is that those not signatories to the code are in the  cold.

Which is why asset managers that are not making it onto the FRC’s list are getting their excuses in early.

The FT tells us

Some 189 asset managers, pension funds and other groups applied to be signatories, with 125 making the cut after a “rigorous review process”, the FRC said. The previous iteration of the code had about 300 signatories.

The FT have clearly had time to contact all the excluded and a few who did not even apply. The order of response tells you a lot about priorities right now.

Goldman Sachs Asset Management, Credit Suisse Asset Management and T Rowe Price declined to comment. BNP Paribas said it had not applied to be a signatory of the code. AllianzGI said it “wanted to get more visibility on the evolving reporting practice” and instead “will be applying next year”.

Northern Trust said it was “working diligently with the FRC to showcase our longstanding commitment to responsible stewardship”. Pimco said it was “committed to the principles of stewardship and engagement”.

And Columbia Threadneedle said it was in the process of applying to be a signatory of the code in time for the FRC’s next deadline in October.  Schroders said it was “frustrated not to be a signatory” and had been told by the FRC that this was due to “the format rather than the substance of our submission

. “We believe strongly in the power of stewardship and constructive engagement with business. We are confident we will be a signatory again soon,” added the company.

State Street and JPMorgan did not respond to a request for comment.

What we are hearing is the noise from the marketing departments but the signal that non-appearance will make on this list will be more significant than in its immediate impact on sales and client retention. JP Morgan has been one of the focus’ of Extreme Rebellion’s recent demonstrations ( I hear the police helicopters above their City offices).

It is not surprising that so many of those excluded are American owned and it may be that we are seeing the impact of the Trump regime on US corporate thinking, but UK based organizations such as Columbia Threadneedle and Schroders may find it harder to dish it out to organisations that they invest in, if they’ve lost FRC signatory status.

Losing credibility at a time when “green-washing” is almost as talked of as “sustainability” is not a good thing, least of all for internal morale.

The fragility of an asset manager’s credentials

Asset managers need to be seen to be caring about ESG. In recent articles, I have been featuring the thoughts of Robert Armstrong who casts doubt over the ethos of what he calls the “ESG investing industry”

  1. ESG investing, if it changes the world, does so by affecting the cost of capital. That implies ESG investors can expect lower returns, but the ESG industry disingenuously promises outperformance.
  2. If ESG investing does provide higher returns, then we can just call it “investing”, and it changes nothing.
  3. The biggest problems ESG investors claim to tackle have time horizons much longer than any investor, so purpose and profit rarely overlap where it matters most.
  4. Funds investing or not investing in a given company in the secondary market doesn’t change much for the company itself, except for its cost of capital, and the market sometimes arbitrages that change away.
  5. Telling people that where they park their retirement savings is going to help save the world (it won’t) distracts them from doing things that actually will save the world.
  6. Green bonds are a capital arbitrage opportunity.
  7. To change the financial calculus of the corporate world, ESG investing would have to be measured in the many trillions, and it ain’t getting there. Because the effect of ESG investing is weak, there will never be enough of it.
  8. Corporations have been designed over centuries as profit-seeking organisations with a responsibility to increase shareholder wealth. Trying to turn them into stakeholder organisations on the fly will fail.
  9. We do not want Wall Street people deciding what is good for society

We might now add a tenth item, denial that external audit might reveal that some of the claims of ESG managers simply don’t stand up, under the FRC’s scrutiny

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions and tagged , . Bookmark the permalink.

1 Response to In the code or in the cold; the FRC sort ESB wheat from chaff

  1. con keating says:

    Robert Armstrong makes some sound points in his criticisms of ESG investing as indeed did Tariq Fancy in his rambling critique. From my own researches, I have found little to support the marketing hype of the ESG movement. However, there is one point over which caution is advised.
    “Corporations have been designed over centuries as profit-seeking organisations with a responsibility to increase shareholder wealth.”
    This does not stand up to close scrutiny. The general availability of the form of the limited liability company is a relatively recent innovation in the UK (1855). It is true that there were some limited liability companies prior to this but they required crown or parliamentary approval – and arguably had a purpose beyond profit. Indeed, it was the need to raise capital in amounts beyond those easily handled by partnerships that prompted the form, not some exclusive pursuit of profit.

Leave a Reply