Financial Reporting Council Impose Tougher Standards for Ethical Funds

The Financial Reporting Council (FRC) has revised its Stewardship Code to impose tougher standards on ethical funds, resulting in many fund managers missing out as signatories.

The FRC is the main watchdog for the audit and accounting industry. Its Stewardship Code is the industry benchmark that sets the standards for insurers, asset managers and pension schemes on behalf of Britain's savers.

Prior to the changes, fund managers had to provide the FRC with a statement about their stewardship and little more. However, this year the FRC has required fund managers to provide more detailed evidence of how their actions complied with industry standards.

The industry standards of stewardship are currently defined as "the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society."

The changes come as the FRC identified a need to improve the quality of reporting as too many firms were releasing "boiler plate" statements with little action behind them.

Many businesses have been accused of similar statements in regard to ESG (environmental, social and governance) statements, commitments and reporting. As investors and consumers continue to prioritise companies that do better for the planet and people, quality ESG reporting has become an ever more pressing issue for businesses that wish to remain competitive.

The tougher standards introduced by the FRC have meant a number of top asset managers have failed to become signatories to the revised code for the first time.

This includes Schroders, one of the UK's largest asset managers, alongside other large firms such as T Rowe Price, Allianz Global Investors and Columbia Threadneedle. In fact, overall 64 firms of the 189 who applied were unsuccessful.

The Chief Executive of the FRC, Sir Jon Thompson, said:

"This list demonstrates our continued commitment to serve the public interest as we transform to becoming a new regulator. We are proud of our robust approach to assessment and encourage those who have been unsuccessful to reflect on our feedback and apply again in future."

The shift in industry standards represents a wider shift towards ESG investing worldwide. According to the Investment Association, the amount of money going into ESG funds in 2020 is four times the amount invested in 2019.

The change serves to show the importance of staying up to date with new consumer and investor expectations. Both the FRC and SEC (US Securities and Exchange Commission) state they will be bringing in further regulations and changes to encourage more sustainable investment in the future.