FRC consults on revised Stewardship Code

On 11 November, the Financial Reporting Council (FRC) published a long-anticipated consultation (the "Consultation") on the update of the UK Stewardship Code 2020 ("the "Code"). This follows interim changes to the Code which were announced earlier this year, as covered in our previous article.

Background

The current version of the Code was introduced in 2020 following an extensive consultation process in 2019. It is widely respected internationally and has a growing number of signatories both in the UK and internationally (the current signatory listed updated in July shows 283 signatories). The FRC committed to review the Code and the current Consultation is the result of engagement with over 1,500 stakeholders during 2024, as well as information gathered from its assessment of current reporting. The key aims of the review are to ensure the Code enables a high quality of disclosures, reflects developing stewardship practices and maintains global standards, without being overly-burdensome for firms.

We have set out below a summary of the key points in the Consultation.

Definition of stewardship

The current definition of stewardship in the Code (which generated much debate during the 2019 consultation on the Code) is:

"Stewardship is 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."

The FRC received feedback from some stakeholders that this definition was interpreted by some to mean that the main purpose of stewardship was environmental and social objectives. The FRC is keen to give signatories the flexibility to determine what they want to achieve through stewardship and therefore the Consultation proposes amending the definition to:

"Stewardship is the responsible allocation, management and oversight of capital to create long-term sustainable value for clients and beneficiaries."

The FRC emphasises that the amended definition is intended to support growth and investment and be broad enough to apply to signatories across the investment chain and different asset classes, without losing the focus on sustainability. It is also designed to promote more transparent conversations on investment objectives between asset managers and asset owners.

Reducing the reporting burden

The FRC received consistent feedback in its engagement earlier this year on the burden of reporting against the Code. In order to reduce the reporting burden, the FRC is proposing that reporting is split into two parts:

• Policy and Context Disclosure - containing information about a signatories organisation, its governance and resourcing and linking to relevant policies.

• Activities and Outcome Report - signatories will be required to submit a report describing how they have exercised stewardship throughout the year and how they have applied the Principles through their activities and the resulting outcomes.

The Policy and Context Disclosure will need to be submitted annually but the FRC will only review it every three years (on the basis that it is unlikely to change significantly from year to year). If there have been significant changes to information in the Policy and Context Disclosure, signatories should explain this in their Activities and Outcome Report. The Activities and Outcome report will be submitted annually covering the preceding 12 month period and will also be reviewed annually by the FRC.

The Consultation also proposes that signatories may cross reference other publicly available information in their reports to reduce duplication in reporting.

These changes build on the interim changes announced in July and the FRC expects that they will reduce the reporting burden and produce shorter, more usable annual reporting for stakeholders.

Refining the principles

The 2020 Code has 12 Principles that apply to asset owners and asset managers and six Principles for service providers with detailed reporting expectations against each Principle. Currently the FRC does not publish guidance on reporting against the Principles. The FRC's view is that the current structure of the Principles can lead to a "tick box" approach to reporting.

The proposed updates to the Principles in the Consultation are:

• Restructuring each Principle to include:
  • brief commentary to explain the Principle
  • high level prompts on how to report against the Principle
  • guidance to indicate the information signatories may use to demonstrate how they have applied the Principles and examples of good reporting

• Removing Context, Activity and Outcomes subheadings from the Principles to recognise that stewardship activities may span multiple years and ensure that reporting does not drive short term activities to meet a reporting requirement.

• Publishing guidance to support reporting against the different asset classes to reflect how the market has changed since the 2020 Code was introduced.

• Setting clearer expectations for different entities in the investment chain by restructuring the Principles to differentiate between those who manage assets director and those who invest through an external manager with the aim of reducing the number of duplicated case studies.

• Introducing specific Principles to be applied by service providers (the FRC is specifically focusing on proxy advisers and investment consultants) to reflect their activities in the investment chain.

• Streamlining the Principles to reduce duplication and boilerplate reporting. Specifically, the Consultation brings together the current Principles 9 and 10 of the Code (engagement and collaborative engagement) and removes Principle 11 (escalation) as a standalone Principle.

Comment

Generally speaking, we expect that the proposals in the Consultation will be welcomed by signatories to the Code. The changes are designed to give signatories more flexibility in their stewardship activities and define what stewardship means for them. They are also intended to encourage signatories to move away from a "tick-box" approach to reporting. We note that this is in line with the FRC's expectations on reporting against the UK Corporate Governance Code. However, not all stakeholders will welcome this proposed approach with some preferring a more prescriptive approach to compliance (particularly in terms of the definition of stewardship).

The FRC was keen to emphasise in the webinar hosted on 20 November that they welcome feedback from stakeholders on whether the proposals in the Consultation documents will support transparent conversations between asset owners and asset managers. The FRC is encouraging stakeholders to actively engage with the Consultation process.

Next steps

The FRC will be hosting a series of roundtables for stakeholders to share their views. These are primarily aimed at current or prospective signatories to the Code.

The consultation runs until 19 February 2025. The FRC expects to publish the updated Code in the first half of 2025, with an effective date of 1 January 2026. Signatories should report as usual in 2025 to maintain their signatory status. New applications to become a signatory to the (2020) Code will no longer be accepted after the updated Code is published.