FRC Stewardship Reframing Risks “Ambiguity”
Proposed revision to stewardship definition seen as potentially weakening ambition and fostering distance between investment decisions and their impacts.
A tweak to the Financial Reporting Council’s (FRC) definition of stewardship in a proposed update to the UK Stewardship Code has been received with alarm by asset owners and managers.
In the current code, stewardship is 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”.
However, due to what the FRC described as “mixed views”, it has proposed an amended version in its latest consultation document to reaffirm that stewardship’s primary purpose is to support the delivery of financial returns, while supporting sustainable, long-term returns which “may lead to wider benefits for the economy, the environment and society”.
The change will be implemented next year pending industry feedback, but many are wary of the implications of the insertion of ‘may’ into the definition.
“[Altering] the mention of environment and society could be interpreted as a weakening of ambition on stewardship from the FRC,” Rachael Monteiro, Climate and Stewardship Analyst at WHEB Asset Management, told ESG Investor. “The addition of the word ‘may’ make broader benefits a ‘nice to have’ rather than a ‘need to have’. In the wake of the politicisation and subsequent backlash against sustainable and responsible investment, that feels like a bold step.
“It’s likely that this new definition opens the door to even greater ambiguity at a time when the industry could do with guidance on some of the most fundamental elements of good stewardship practice, such as how to define objectives, outcomes, and activity as well as high quality reporting of progress and outcomes,” she added.
The Church of England Pensions Board’s Chief Responsible Investment Officer Adam Matthews was particularly critical of the proposed change to the definition. Matthews said the change could “open the door to a view of sustainability that legitimises externalities as if finance is in a vacuum operating absent impact on society”. He also questioned where the efforts to “weaken corporate governance in the UK” were coming from, and who would benefit from the altered stewardship definition.
Bending to pressure
The latest consultation on the code forms the second part of a three-phase review announced last November. It builds on interim measures announced in July 2024, which included reducing annual reporting requirements and offering greater clarity on stewardship outcomes.
The consultation, which runs until 19 February 2025, follows engagement with more 1,500 stakeholders over the course of this year and analysis of four years of reporting against the 2020 code. The updated code is expected to be published in early-to-mid 2025 for implementation, with the first reporting cycle in 2026. Initially launched in 2010, the code was last revised in 2019.
Lucy Hussona, Analyst at UK-based consultancy Canbury Insights, said that the new definition risks downplaying the interconnectedness between the actions of the investment industry and its “wider implications for the economy, environment, and society”.
“This new wording could foster an artificial separation between investment decisions and their broader consequences, overlooking the complex interplay between financial markets and the world they operate in,” she added.
As of July 2024, the code counted 287 signatories, collectively accounting for £50.1 trillion (US$63.5 trillion) in AUM. The signatories include 196 asset managers, 72 asset owners and 19 service providers – illustrating broad adoption across the finance sector.
At ESG Investor’s 2024 Stewardship Summit in May, the FRC’s Head of Stewardship Andrea Tweedie said the review intended to evaluate the balance between long-term sustainable outcomes and regular, clear and transparent reporting.
“If accepted, I think there will be a question about who the UK Stewardship Code exists to serve especially as UK asset owners have been generally accepting of the existing definition,” said WHEB’s Montiero.
At the start of this year, the FRC was criticised for watering down its ESG and audit requirements in revision of the UK corporate governance code, having dropped proposals that would have toughened such requirements.
International interest
Approximately 40% of the code’s nearly 200 asset managers signatories are headquartered outside the UK, with some of the largest – including Goldman Sachs and JP Morgan – based in the US. In recent years, the country has seen ESG-led investment face heightened criticism with asset managers increasingly repositioning their stewardship activities, a process which could yet intensify under a second Trump presidency.
“Some of the revisions appear to appeal to certain groups, such as US-based asset managers and particular lobby groups, potentially at odds with UK-based asset owners and managers who are already comfortable with the existing definition and practices of stewardship,” said Hussona.
The previous definition already offers “sufficient flexibility” for organisations to report in a way that is “appropriate to their own approach and business models”, she said, which is reflected in the “large variety” signatories.
Gustave Loriot-Boserup, Founder of ESG analytics and advisory platform Compass Insights, insisted that despite the “relatively negative reception”, the proposed changes to the code “do not water it down in any way compared the 2020 version”.
He suggested that the amendment instead offers greater flexibility for signatories in their engagements with companies, as well as shifting to a greater focus on achieved outcomes.
“Some commentaries on including ‘may’ ignore that historically there have been some issues in providing a clear causal link between stewardship activities and specific outcomes achieved for the environment, such as potential reduced greenhouse gas emissions in the real economy,” added Loriot-Boserup, who previously spent more than two and a half years at S&P Trucost and three years at local government pension scheme London CIV.
“There’s no absolute certainty that the stewardship activity pursued by one member of investment community pursues actually delivers on those environmental, social and broader societal benefits, and this is what the implication of this added term reflects.”
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