FRC Streamlines Stewardship Code
Industry experts underscore the need for change to ease practical challenges, as signatories approach 300 and AUM crosses the £50 trillion mark.
The UK’s Financial Reporting Council (FRC) has moved to reduce reporting burdens and streamline processes for signatories through a revamp of its Stewardship Code.
Following the culmination of phase one of the review, the council unveiled five focus themes for the next phase, as well as five immediate changes to soothe resource challenges surrounding stewardship reporting. Revisions to the stewardship application process were based on engagement with more 1,500 stakeholders this year, and will apply for the next application window on 31 October. The changes are part of three-phase review originally announced last November.
“We’ve heard during our conversations with signatories and other stakeholders that preparing stewardship reports is resource-intensive, and noticed over the past few years that reports have gotten longer and longer,” said Andrea Tweedie, Head of Stewardship at the FRC. “From the code’s asset owner signatories, we heard about the challenge of the reporting burden. That’s reflected in the areas we want to take forward during our next round of engagement, and also through interim reporting measures.”
The five themes outlined for this review phase include purpose, principles, proxy advisors, process, and positioning – looking to ensure the code is supporting UK capital markets, reducing reporting burdens and driving better stewardship outcomes.
Meanwhile, the five immediate changes for existing code signatories include removing the requirement to annually disclose all reporting expectations around ‘context’ – except for new reports or material changes – and setting clear expectations of what is considered an ‘outcome’ for stewardship purposes.
“I don’t think this move signals a lowering of standards – it’s more an easing of significant practical challenges, considering benefit versus cost of providing certain information,” Lindsey Stewart, Director of Stewardship Research and Policy at Morningstar Sustainalytics, told ESG Investor. “This will certainly be welcomed by many reporters who feel that, in some areas, they’ve been merely transcribing information from one publicly available report into another to meet their stewardship code obligations.”
Onto the next phase
This second phase of the review comes after the ‘listening’ segment, which focused on the four main groups – asset owners, asset managers, service providers and corporates – affected by the code’s principles and their application.
“We wanted to make sure that in undertaking this review, we knew what the right areas look at were,” Tweedie explained. “That’s why we started with this listening exercise rather than going straight into the consultation.”
The second phase will now consist in a full public consultation, due to be launched in the summer after the 2024 AGM voting season. The final phase will see a revised version of the code being published sometime during Q1 2025, with a likely effective date in January 2026. Initially launched in 2010, the code was last revised in 2019.
Alongside the revisions, the FRC updated its list of signatories. The code now counts 289 signatories, collectively accounting for £50.3 trillion (US$64.8 trillion) in AUM – an increase from the 273 signatories and £43.3 trillion AUM during the last update in February. The signatories include 198 asset managers, 72 asset owners and 19 service providers – illustrating varied adoption across the finance sector.
“We want to try and make the code user friendly,” said Mark Babington, Executive Director of Regulatory Standards at the FRC. “Our code is used by global fund managers, but also used by small boutique providers, so we’ve got to have something that’s responsive and reflects all of the needs in different parts of the market.”
Earlier this year, panellists at ESG Investor’s 2024 Stewardship Summit shared their concern that stewardship continued to be under-resourced across the global investment industry, sparking calls for upskilling and collaborative action in the sector to bridge the gap.
“This year’s fundamental review of the code will be important at a time when the regulatory landscape has changed,” said Stewart. “It will be important for the FRC to strike a tidy balance between streamlining requirements, reducing overlap with new regulations, and ensuring the code maintains its reputation for prompting meaningful disclosures from asset managers, asset owners and service providers.”
A topic of global relevance
Approximately 40% of the Stewardship Code’s nearly 200 asset managers signatories are headquartered outside the UK, underlining the importance of there being such a standard globally.
“We were really pleased to hear the high regard that the Stewardship Code is held in and that so many signatories and others we spoke to say it’s played a really important role in improving standards and transparency around stewardship practices,” said Tweedie.
Will Martindale, Managing Director at ESG consultancy Canbury Insights, argued that the code has raised the profile of stewardship both in the UK and globally – leading to increased stewardship resourcing, as well as offering guidance and structure to bolster the quality of engagement between investors and companies with a focus on sustainability outcomes.
“In streamlining the reporting, I would like to see the FRC retain several aspects I believe make the code world-leading – including reporting on stewardship outcomes,” Martindale added. “It is important for it to retains its reputation as an industry gold standard, for the principles to be challenging and the assessment process rigorous, and for investor stewardship processes to continue to improve.”
As part of its work, the FRC has been closely collaborating with other regulators and UK government departments involved in stewardship – including the Pensions Regulator, the Financial Conduct Authority, and the Department for Work and Pensions.
Tweedie also chairs the Stewardship Regulators Group, which brings together regulators and government departments that have either a responsibility for, or interest in, stewardship policy and regulation. “We’re really aware that the Stewardship Code doesn’t exist and operate in isolation, but that we are part of a wider regulatory framework,” she underlined.
Earlier this year, the FRC made revisions to the UK Corporate Governance Code, with goals to enhance the transparency and accountability of UK companies and support the country’s growth, competitiveness and attractiveness.
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