The Financial Services Council (FSC) has launched Australia’s first compulsory asset stewardship code for fund managers.
The FSC Internal Governance and Asset Stewardship Standard, unveiled on Wednesday, July 19, 2017, lays out a code of practice for how fund managers should meet obligations for transparency with their governance practices. This includes rules for how they disclose their corporate voting policies, and how they attempt to engage and influence the companies they invest in on environmental, social and governance (ESG) issues.
Compliance will be mandatory for all FSC asset-manager members. This captures about 50 funds management firms, which together manage the lion’s share of the roughly $2.8 trillion in funds under management in Australia.
However, the code will not be compulsory for FSC members that do not run money in-house, which means those retail superannuation and wealth-management firms that outsource all of their investment management. Retail super funds that run money internally will be covered by the code.
FSC chief executive Sally Loane encouraged those parts of the industry for whom the code will not be mandatory to adopt it on a voluntary basis.
“All investment managers and asset owners are encouraged to sign up,” Loane said.
Until now, Australia was one of the only major economies – and the only signatory to the Asia Region Funds Passport – without such a standard.
Starting with the UK in 2010, stewardship standards have been established in many markets, including the US, Japan, Hong Kong, the Netherlands, Switzerland, South Korea, Malaysia and Brazil, to name a few.
Loane said the peak body had looked to international best practice to inform its code.
“We’ve looked at all these standards and we’ve picked the eyes out of them,” she said. “We think we’ve put together the standard that is probably the highest in the world and if not the highest, one of the highest.”
The new code comes as both retail and institutional investors are placing increasing demands on fund managers to demonstrate how they account for ESG risks in their portfolios.
“Australian fund managers are responsible for managing and growing one of the biggest pools of funds in the world – almost $3 trillion – the retirement savings of millions of Australians,” Loane said. “The vast bulk of these funds exist because of our mandatory superannuation system. Fund managers understand their role and responsibility very clearly – increasing the wealth and improving the livelihoods of the people whose money they invest – and they now have a standard that sets what is perhaps the highest bar in the world for stewardship and governance.”
Standards ‘hold us to account’
The FSC now has 17 standards with which its members must comply. “Essentially, if you can’t meet a standard, or don’t want to, then you can’t be a member of the FSC,” Loane said.
Aberdeen Asset Management managing director Brett Jollie, who is also an FSC director, said standards development was a vital component of what the peak body provides to the industry, investors and consumers.
“Because we have to abide to these standards, they hold us to account,” he said. “It’s about self-regulation and setting best practice for the industry in different areas.”
Jollie said the work required to get up to speed with the standard will vary from member to member. “Some may have to make more changes than others, but again, that’s part of the reason we are bringing everyone up to a common standard.”
Global asset managers are used to working with stewardship standards in most jurisdictions.
“These have flowed down to Australia as well,” Jollie said. “I think we have most of the practices. It’s just about being more transparent around them.”
Indeed, greater transparency is a foundation of the new standard. It is basically disclosure based, requiring fund managers to disclose in a single, concise place their approach to internal governance and asset stewardship. This increased openness should bolster confidence in Australia’s fund managers.
The standard also requires managers to engage with the companies they invest in to a higher degree and to ensure their eyes are wide open, Jollie said.
“It’s more than making a quick investment…It’s about understanding the companies we invest in,” he explained. “It’s about being actively involved in shaping policies of companies, particularly where we may not agree with those policies…It’s about developing long-term sustainable businesses for us to invest in and ensuring that this grows value over time.”
State Street Global Advisors head of Asia-Pacific, Lochiel Crafter, an FSC member who contributed to the working group that developed the code, said the consultation process had been detailed and he didn’t expect the standard to be too hard for fund managers to comply with.
“A lot of these things are already implicitly being done,” Crafter said. “We are just being more explicit about them.”