This article was first published in the April 2019 UK edition of Accounting and Business magazine.

John Kingman’s verdict on the UK’s stewardship code, which guides asset managers and owners, is that it should focus on outcomes and effectiveness, not policy statements. If it does not do that, he says in his review of the Financial Reporting Council (FRC), then ‘serious consideration should be given to its abolition’.

So the FRC’s proposed revision to the nine-year-old code needs to prompt those who deploy our savings to demonstrate action rather than just say the right things about responsible investment. For this purpose, the most important addition will be an annual activities and outcomes report.

Policy statements will remain, of course, reflecting the organisation’s ‘purpose, strategy, values and culture’ – a big ask for an institution managing funds for multiple investment purposes across multiple asset classes. Yes, that means bonds as well as equity.

The ambition of the new approach is captured in the definition: ‘Stewardship is the responsible allocation and management of capital across the institutional investment community to create sustainable value for beneficiaries, the economy and society.’ The first part is conventional wisdom; the second has a whiff of private savings being used as a vehicle for public policy.

The assumption is that there is a positive connection between better corporate behaviour on environmental, social and governance issues, and sound capital allocation. This is easiest to understand at the risk management level: companies that pollute the environment, abuse their staff and suppliers, and rip off their customers are unlikely to create value.

But the trade-offs can be uncomfortable. Some fund managers have asked HSBC to stop funding coal-fired power stations in Indonesia, Bangladesh and Vietnam. The bank has done so elsewhere but is giving these countries more time to bring adequate power supply to areas without it.

This is a high-profile example of engagement with a company. It will look good in the new activity reports of the fund managers involved, but the resources available will not stretch to the hundreds, or even thousands, of companies across all their portfolios.

How will the managers decide where to focus their efforts? Sophisticated screening will help search for the laggards, but are the data collection metrics and processes good enough to automate this reliably?

The new code will help propel areas of public concern to the forefront of management-thinking at big investment houses. For passive funds, engagement with companies is the only way to drive improvements in behaviour. But this is not the same as allocating capital to the most promising and productive businesses, and selling the others.

Jane Fuller is a fellow of CFA Society of the UK and co-director of the Centre for the Study of Financial Innovation.