FRC Promises High Bar for New UK Stewardship Code
Changes will help to streamline reporting requirements and ensure they can easily be applied by all signatories.
The new UK Stewardship Code won’t lower ambition but will instead introduce more flexibility that better caters to its breadth of signatories, according to the Financial Reporting Council (FRC).
The FRC this week hosted a webinar discussing an ongoing consultation to revise the 2020 edition of the Stewardship Code, providing an update on findings ahead of the consultation closing on 19 February.
“It’s not our intention with the proposed changes to the Stewardship Code to lower the bar on the standard of stewardship,” said Andrea Tweedie, the FRC’s Head of Stewardship.
“We want to introduce flexibility, making sure we’re catering to all different signatory types, while maintaining a high standard of reporting that accurately reflects their [stewardship] practices. The [new code] is going to feel different – but all the core elements are there, so it should be a case of signatories adjusting what they are doing and hopefully seeing the benefits of what we have proposed.”
The consultation has introduced five principles for a revised code, including a new stewardship definition focused on long-term value, a more streamlined reporting process, targeted principles for different signatories such as proxy advisors, and guidance to aid the implementation of updated reporting requirements.
“We have tried to be really clear on what stewardship delivers,” said Mark Babington, the FRC’s Executive Director of Regulatory Standards.
“But it’s not for the FRC to be prescriptive about the way in which signatories deliver their stewardship, and that reflects the fact that there are different types of signatories with different business models.”
The FRC consultation has also clarified what constitutes an ‘outcome’ for stewardship purposes, noting that evidence for outcomes comes from constructive, positive and ongoing engagement. Altered investment decisions because of engagement is also an ‘outcome’, said the FRC.
“[Stewardship] doesn’t look the same for everyone, and we need to give [signatories] the flexibility to report in ways that reflect that,” said Babington.
Slight push back
Some proposed changes have been challenged by signatories, the FRC acknowledged.
The 2020 code defines stewardship as the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries which allows for sustainable benefits for the economy, the environment and society.
The FRC has argued this definition is misleading, encouraging signatories to pursue environmental and social objectives over monetary value to clients. The watchdog said it is for individual investors to determine their specific investment objectives.
As such, the FRC’s proposed changes would include removing explicit mention of the environment and society from its definition of stewardship, which some signatories have warned is lowering ambition on sustainability.
“There are some respondents to the consultation who have said our definition should be going a lot further – it should be much stronger on that link between economy, environment and society,” said Tweedie.
“But we have also heard from others who think even what we have proposed has gone too far, and we shouldn’t have the words ‘long-term’ or ‘sustainable’ in there.”
Last year, the FRC was also criticised for watering down its ESG and audit requirements in revisions to the UK Corporate Governance Code.
The existing Stewardship Code, published in 2020, is backed by over 270 signatories with collective assets in excess of £44 trillion (US$54.5 trillion).
The FRC will be updating its signatory list on 11 February, Tweedie revealed.
Stepping stone
In this period before the new Stewardship Code comes into force in 2026, the FRC has made interim changes for signatories which are currently in effect.
These changes have been designed to reduce the reporting burden on existing signatories, removing the annual disclosure requirements for context reporting and the requirement for asset managers and asset owners to provide annual disclosures against ‘activity’ and ‘outcome’ reporting expectations for principles one, two, five, and six.
“There has been a lot of support for focusing on quality over quantity,” said Tweedie.
“We want to make it clear that we are not pushing for reporting on stewardship activities for the sake of tracking those activities. It is about showing what signatories are achieving. How does this [approach] fit into your overall view of stewardship? What are you doing on behalf of your clients or beneficiaries?”
Panellists at ESG Investor’s Stewardship Summit last year highlighted their concerns that stewardship is under-resourced across the global investment industry, sparking calls for upskilling and collaborative action in the sector to bridge the gap.
“Stewardship is not a compliance exercise,” added Babington.
“We want [signatories] to spend as much time as possible focusing on how they deliver their stewardship.”
In January, Kate O’Neill, the FRC’s Director of Stakeholder Engagement and Corporate Affairs, spoke at the Investment Association’s Stewardship and Corporate Governance Forum, outlining the regulator’s near-term priorities across stewardship, corporate governance and audit reform.
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