This is an interview with Claudia Chapman, Head of Stewardship at the UK FRC (Financial Reporting Council).
Q: Tell us a bit about your background and career, and how you came to focus on investment stewardship?
I began my professional career in marketing and communications for the Association of Chartered Certified Accountants (ACCA), the global professional accountancy membership organisation. I was given the challenge of raising the profile and reach of their technical research publications. We developed this into the Research and Insights thought leadership programme and I soon became more interested in corporate governance and finance policy than marketing. After heading up policy and campaigns aimed at raising standards of corporate governance in markets aligned to ACCA’s growth markets, I had the opportunity to join the home of the UK Corporate Governance Code – the FRC.
I joined the FRC to lead the project Corporate culture and the role of boards, sponsored by the late Sir Win Bischoff. We had incredible access to FTSE Chairs, chief executives, and their teams which gave us great insight into the challenge boards and organisations faced in curating a healthy culture. The observations of our report led to the inclusion of purpose and culture in the UK Corporate Governance Code. At the same time, I was supporting the exercise to tier the quality of reporting to the UK Stewardship Code 2012, so was then well-placed to lead the review of the Code in 2019.
After extensive consultation, we published a substantially revised Code which took effect in 2020, with the first reports in 2021.
Q: As Head of Stewardship at the UK FRC, what’s your work about and what are the FRC’s objectives when it comes to investment stewardship?
In the early days of the revised Code, my focus was much more on establishing the team to develop a robust and fair assessment process to evaluate applications. This included engaging with prospective signatories about our expectations and feeding back to applicants on their reporting. We set a high bar for fair, balanced and understandable reporting against the principles of the Code, asking signatories to be transparent about their approach and the outcomes of their work.
Now my role is more about working with other regulators, government departments and industry to evolve the framework for effective stewardship policy and regulation; and raise the standards of stewardship practice and reporting in the UK and globally through public engagement. The UK developed the first stewardship Code and has the most robust expectations and assessment process globally. We often work with other jurisdictions to share our experiences. Ensuring my team’s continuous development, so they have interesting and rewarding work, is also important. We’re gearing up to review the Code at the end of 2023, and are reviewing the evidence for effective stewardship and considering how expectations should evolve.
The purpose of the FRC is to serve the public interest by setting high standards of corporate governance, reporting and audit and holding to account those responsible for delivering them. Our work sits at the heart of the FRC, even within a wide remit of financial reporting and regulation.
Q: The FRC is responsible for the UK Corporate Governance and Stewardship Codes. Given how many investors face market-specific voluntary and statutory requirements, what’s your view on the collaboration between standard setters globally?
In the areas of Corporate Governance and Stewardship, the UK has tended to lead the way so, although there are substantive differences in some areas, we see many other jurisdictions evolve their practice over time in line with the standards set in the UK. We work with a network chaired by the International Corporate Governance Network that brings together other bodies that oversee stewardship codes.
The FRC has been supporting international efforts towards a common international framework for sustainability disclosures and welcomed the establishment of the International Sustainability Standards Board (ISSB) in 2021 and are represented on the ISSB’s Sustainability Standards Advisory Forum.
Q: Recognising the global influence of the UK stewardship code, with the update in 2020, what are some of the main developments you’ve seen over, say, the past five years?
Historically, investment stewardship was predominantly an equity-only activity, but we expanded the Code to cover all assets under management and investors are expanding the scope of their practice to cover asset classes such as fixed income, real assets and private equity. We know from research we commissioned in 2021 that the Code has accelerated this. Bondholders may, for example, maintain an ongoing dialogue with issuers on ESG concerns to improve oversight of the related credit risks and improve the quality of issuances. Real estate investors are seeking out certifications, such as the GRESB rating, for their properties to validate the quality of sustainable enhancements. We anticipate that the way in which investors exert their influence and exercise their rights outside of listed equity will evolve rapidly in the next few years.
Necessarily, we’re also seeing the growth in systemic or macro-stewardship. Investors, especially universal owners such as large index providers, pension funds and sovereign wealth funds, are looking beyond individual portfolio risk and seeking to address risks to the well-functioning of the entire financial system, to support wealth creation. We anticipate that collaboration between investors, regulators and other important stakeholders in the market will be vital to addressing systemic risks.
We’ve also seen that the governance of stewardship and stewardship teams has risen in organisations. The Code requires the stewardship report to be reviewed by the board and signed off by the Chair, the Chief exec or Chief investment officer.
Q: In a conversation recently, an asset manager noted how there’s a gap between current stewardship expectations and the willingness to pay for it. That is, while expectations continue to increase, asset owners are reluctant to pay extra for it. What do you make of this?
Client expectations for stewardship have certainly increased in the last several years. Effective stewardship requires resources, which costs money and the investment in the number and expertise of teams varies significantly from manager to manager.
It has been difficult to know what appropriate resourcing of investment stewardship looks like for different types and sizes of investors, and depending on the level of commitment to effective stewardship. The Principles for Responsible Investment (UNPRI) are working with the Thinking Ahead Institute (TAI) to research and assess the appropriate level of resources that investors should be prepared to dedicate to stewardship within their organisations, and we’re following that work with interest.
Q: Coming back to the updated code, the FRC has published a number of reports to assess its influence on investor practices and reporting, what are some of the key findings in these?
In the three years since the publication of the 2020 Code, we have released annual reports which review the quality of reporting assessed, clarify our expectations and feature examples of better-practice reporting. In that time we have noted improvements in the quality of activity and outcome reporting for engagement, collaboration and escalation, signatories’ contributions to addressing market-wide and systemic risks and improving the functioning of financial markets, and how signatories monitor and hold to account third parties, such as asset managers and service providers.
When we published the Code back in 2019, we also committed to formally evaluating its impact. In 2021, we commissioned independent research by Minerva Analytics in collaboration with Durham University Business School and King’s College London which surveyed and interviewed applicants to the Code following their first application, but before they knew the outcome.
We were really encouraged by the results which showed there was strong evidence of material changes to practice in the areas of governance, resourcing, stewardship activities, outcomes and reporting.
Of those surveyed, 96% reported increases in the size of their stewardship teams since the introduction of the new Code. All organisations that the researchers spoke with said that they participate in some form of engagement and escalation with issuers, and 77% said that the quality of those engagements had improved since the introduction of the 2020 Code. Perhaps the most encouraging finding though was that asset owners reported that the Code has empowered them to monitor their investment managers more thoroughly and confidently.
Q: On that note, where do you think investment stewardship is bound to go next? And from a regulatory perspective, what kind of oversight should we reasonably expect in the future?
We’ll see greater professionalisation of stewardship. There’s a programme being launched in the Autumn by an organisation called StePS Stewardship Professionals which has been developed with the input of some highly regarded names in the profession.
Stewardship in asset classes other than listed equity will become more widespread and sophisticated as investors identify the opportunity to influence the value of their investments and sustainability outcomes through engagement.
Collaborating with others in the investment community to influence policymakers, regulators, standard setters, and issuers to address market-wide and systemic issues will become more mainstream, and expected practice by the providers of capital.
Q: Time for final remarks, if you could ask for one thing of investors, what would it be?
Remember that looking after other people’s money is a privilege and with that comes responsibility. Be clear about your intent, think about where you can have the most impact, and channel your resources appropriately. That’s four things!
Thank you Claudia and good luck with the important work at the UK FRC!
Interviewer: Rickard Nilsson, Head of Stewardship Success, Esgaia
Interviewee: Claudia Chapman, Head of Stewardship, UK Financial Reporting Council
As Head of Stewardship for the Financial Reporting Council (FRC), Claudia is responsible for the UK Stewardship Code, a world-leading voluntary code that sets expectations for investors when looking after their clients’ and members’ capital. Claudia led the review and update of the Code which took effect on 1 January 2020. She has just completed a secondment with the FCA, working on stewardship policy in the ESG Division and embedding stewardship with the Asset management supervision.
Claudia grew up in Jamaica, before studying Geography at Cardiff University and is a Chartered Marketer.