Battlelines Drawn Over UK Stewardship Code
Investor concerns linger over attempts to sideline sustainability, but others say simplification was long overdue.
Many sustainability-focused investment managers and asset owners remain anxious that the UK’s Financial Reporting Council (FRC) has removed all mention of ‘environment’ and ‘society’ from its definition of stewardship.
Others, though, see this as a positive step, saying that the simplification will make it easier for companies and asset managers to live up to their sustainability commitments.
The previous version of the Stewardship Code, adopted in 2020, defined stewardship as the creation of long-term value for clients and beneficiaries, “leading to sustainable benefits for the economy, the environment and society”. In the proposed revision this phrase has been replaced by the more generic term ‘sustainable value’.
The FRC says that this change is needed to give greater clarity to asset managers in meeting commitments to asset owners.
“The proposals are designed to support the ongoing high standards of stewardship which are at the heart of the code,” Andrea Tweedie, FRC Head of Stewardship, told ESG Investor. “Without diminishing the importance of environmental and social considerations, the proposed change to the definition is intended to support better and more transparent conversations through the investment chain about how stewardship supports that.”
Last week, the FRC said that 297 institutions had signed its Stewardship Code so far, accounting for a total of £52.3 trillion (US$64.7 trillion) in AUM. This comprises 199 asset managers, 77 asset owners and 21 service providers.
Global harm
Maria Nazarova-Doyle, Global Head of Sustainable Investment for IFM Investors, a private markets-focused manager owned by asset owners, strongly disagrees that the shift will make things better for investment managers and the asset owners that they serve.
“If the seal of the approval from the FRC is worth less in the eyes of asset owners, they will need to find other ways of getting the information they need,” says Nazarova-Doyle. “Asset managers will not just have the burden of reporting to the FRC. They will also have to field additional requests from clients who see the FRC assessment as insufficient and no longer covering their approach to systemic risk.”
Nazarova-Doyle says there is no need to change the wording of the code, believing it adequately meets requirements.
However, if the definition does need to be changed, she favours the alternative wording put forward by the UK Sustainable Investment and Finance Association (UKSIF) and the Pensions and Lifetime Savings Association. This says that stewardship should “have regard” for rather than “lead to” benefits for the environment and society.
Oscar Warwick Thompson, Head of Policy and Regulatory Affairs at UKSIF, which represents financial services firms committed to sustainability, said: “It is particularly essential that the finalised stewardship definition is not perceived to dilute the code’s purpose and role as a high-quality benchmark for investor stewardship and engagement. It should still signal the importance of signatories considering the wider economic, environmental and social systems in which they exist, while also addressing concerns with the current definition’s causal links implied between stewardship and real-world outcomes.”
Fergus Moffatt, Head of UK Policy at shareholder advocacy group ShareAction, believes the repercussions will be felt worldwide.
“Many signatories are international investors, so a weaker stewardship code in the UK means weaker stewardship standards globally,” he said.
“While voluntary, the code is seen as such a competitive differentiator in the market that many firms feel obliged to sign up to it because they know that’s what their client and prospective clients expect. They want their asset managers to be long-term responsible stewards of capital, and the code is excellent in encouraging signatories to do that.”
Value in simplification
While many institutional investors are unhappy about the proposed changes, others say that simplifying the code was long overdue and will actually make it easier, rather than harder, to incorporate sustainability principles into stewardship.
“Our view is that the definition, as it stands at the moment, is trying to say two different things at the same time,” said Paul Lee, Head of Stewardship and Sustainable Investment Strategy at investment consultants Redington. “The FRC’s proposed change will make it much easier and more straight-forward for managers to understand what is being asked of them, and therefore to feel more supportive in delivering this. It is not removing the intent to think about long-term risks, which is fundamentally what ESG is.”
Paras Anand, Chief Investment Officer at UK-based active managers Artemis, agrees, saying that organisations should be given the opportunities to conduct stewardship in a way that aligns with the value proposition that they bring to their customers.
“This means that investors can be more anchored in their commitment to eliciting real-world outcomes, rather than just trying to fulfil a set of criteria on a page. I don’t think this revision represents a reduction in ambition. If anything it represents the exact opposite,” he said.
Battlelines drawn
The consultation on the new Stewardship Code concluded on 19 February.
Against an increasingly polarised backdrop, the FRC now has the unenviable task of sifting through all the responses to decide how to take things forward.
“We look forward to working through written responses to the consultation, which will be thoroughly reviewed and considered,” said Tweedie.
Nazarova-Doyle from IFM Investors said it should become clearer in the coming months which side the FRC will come down on.
“I’m not sure whether the FRC will publish all of the responses or just some of them, but if they publish all of the responses in their entirety then we’ll be able to see the weight of evidence and make a judgement about whether [the FRC] has done the wrong thing or the right thing,” she said.
The final version of the updated code is expected to be published in the first half of this year and will be effective from the start of 2026.
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