Stewardship and Sustainability: the revised UK Stewardship Code

The FRC’s revised Stewardship Code (UK Stewardship Code 2020) is a substantially different document from the current version of the Code and requires asset owners and asset managers signing up to it to report annually (and in detail) on their stewardship activities.

The 2020 Code takes effect on 01 January 2020 and applies in respect of reporting years beginning on or after 01 January 2020. The Code continues to be voluntary and asset managers and asset owners wanting to be signatories must publish their first Stewardship Report by 31 March 2021. (The FRC has removed the requirement for a Policy and Practice Statement on signing up to the 2020 Code.)

The FRC will review the Stewardship Reports and publish a list of signatories to the Code in Q3 2021. This will be a single list and signatories will not be graded or (unlike now) tiered. A signatory’s Stewardship Report needs to meet the FRC’s reporting expectations for the signatory to be listed.

The FRC has also published a Feedback Statement to its January 2019 Consultation Paper on the Code and has taken into account feedback that the FCA has published (FS19/7) in response to its own discussion paper, “Building a regulatory framework for effective stewardship” (DP19/1).

What are the key changes for asset managers?

These are:

• a clear benchmark for stewardship - stewardship is now 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”;
• extended scope – the 2020 Code now covers asset owners (such as pension funds and insurance companies) and service providers as well as asset managers;
• annual reporting – asset managers will have to report annually on their stewardship activities in the previous year and what the outcome was, including how they engaged with the assets they invested in (“Stewardship Report”).
• ESG factors (including climate change) – environmental, social and governance factors must be taken into account in all stewardship activities and signatories must ensure their investment decisions are aligned with the needs of their clients;
• stewardship across all asset classes – signatories are now expected to explain how they exercised stewardship across all asset classes (not just listed equity). Other asset classes include fixed income, private equity and infrastructure and investments outside the UK;
• organisation’s purpose, investment beliefs, strategy and culture required – signatories are required to explain what these are and how their governance, resourcing and staff incentives help with them. This aligns the 2020 Code with the UK Corporate Governance Code.

‘Apply or explain’?

The 2020 Code has been restructured into 12 Principles which asset managers and asset owners must either apply or explain why they have not. Again, this aligns the 2020 Code with the UK Corporate Governance Code which has ‘apply or explain’ provisions.

The 2020 Code recognises that there is no one approach to stewardship - organisations can meet the Code’s expectations in a manner that is aligned to their business model and strategy.

See below for “Principles at a glance”. There are a separate set of 6 Principles for service providers.

All of the principles have ‘reporting expectations’ that indicate the information that signatories are expected to include in their Stewardship Report and that will form the basis of the FRC’s assessment of reporting quality.

What should a Stewardship Report contain?

This report is expected to:

• be engaging, succinct and in plain English;
• be as specific and transparent as possible;
• be fair, balanced and understandable;
• focus on activities and outcomes;
• provide enough information to enable a good understanding of the Code’s application without having to refer to other information (although it can link to more detailed policies and procedures);
• provide a clear indication of how stewardship activities differ across funds, asset classes and geographies proportionately to their operations;
• be reviewed and approved by the organisation’s governing body and signed by the chair, chief executive or chief investment officer; and
• once approved by the FRC, be made available on the signatory’s website.

What are stewardship activities?

The 2020 Code states that stewardship activities include:

• analysis before investment;
• monitoring assets and service providers;
• engaging issuers and holding teams to account on material issues;
• working with others to influence issuers and to manage market-level risks; and
• publicly reporting on the outcomes of those activities.

What is the overlap with SRD II requirements?

The Feedback Statement states that organisations can use their Stewardship Report to fulfil their reporting requirements under the Shareholder Rights Directive II, for example to disclose their engagement policy and how they have fulfilled it.

The 12 Principles at a glance

Purpose and Governance

1. Purpose, strategy and culture
2. Governance, resources and incentives
3. Conflicts of interest
4. Promoting well-functioning markets
5. Review and structure

Investment approach

6. Client and beneficiary needs
7. Stewardship, investment and ESG Integration
8. Monitoring managers and service providers

Engagement

9. Engagement
10. Collaboration
11. Escalation

Exercising rights and responsibilities

12. Exercising rights and responsibilities