The Financial Reporting Council’s (FRC) consultation on updates to the UK Stewardship Code closed last week and, while many financial services experts welcomed the streamlining and flexibility of the proposed new reporting requirements, some remain sceptical about the updated definition of the term ‘stewardship’.
In November, the FRC suggested changing its definition of stewardship, omitting references to the environment and society in favour of a definition emphasising the need to create long-term “sustainable value” for clients. Consequently, the UK Sustainable Investment and Finance Association (UKSIF) suggested a different definition which it says is supported by the Pensions and Lifetime Savings Association as well as a number of UKSIF members.
Also read: Turning the page on the UK Stewardship Code
PA Future asked industry professionals for their thoughts on the FRC’s consultation, and whether it is a net positive for both investors and the sustainable finance sector.
Revised stewardship definition supported by IA members
Andrew Ninian, director of stewardship, risk and tax, the Investment Association
The UK Stewardship Code has been instrumental in promoting effective stewardship practices, enhancing transparency and supporting long-term value creation for end savers. The proposed revisions to the Code represent an opportunity for the UK to lead globally by balancing growth, competitiveness and high standards of corporate governance and stewardship.
The revised definition of stewardship is supported by the majority of Investment Association members, as it focuses on financial materiality and the role of stewardship in delivering long-term value for clients, while also meeting their broader investment objectives. The streamlining and flexibility within the new Code recognises that there is no one-size-fits-all approach and that different signatories will conduct stewardship depending upon their business model, investment strategies and client expectations.
New definition ‘potentially reduces the Code’s relevance’
Inês Cunha Pereira, responsible investment manager, TPT Investment Management
We welcome the streamlining of reporting requirements, which reduces the administrative burden for signatories while maintaining transparency. However, the omission of explicit references to broader societal benefits in the economy, environment and society from the new definition narrows its scope, potentially reducing the Code’s relevance to systemic challenges such as climate change, biodiversity loss and societal inequality. These are issues that may directly impact long-term financial outcomes.
The 2020 Code’s broader framing acknowledged the interconnected nature of financial, environmental and social sustainability, encouraging a holistic approach. Many investors, including TPTIM, recognise that long-term financial value cannot be disentangled from systemic risks. As such, we would suggest retaining language that acknowledges the interconnected nature of financial and broader sustainability outcomes.
‘A deviation from the high standard set in the 2020 Code’
Lindsey Stewart, director of stewardship research and policy, Morningstar Sustainalytics
Overall, the FRC’s amended definition of stewardship allows a broad range of Code signatories the flexibility to determine for themselves how and to what extent they wish to incorporate wider sustainability outcomes subject to client preferences and applicable law and regulation. The proposed emphasis on “long-term sustainable value for clients and beneficiaries” captures the prevailing market realities. However, the change in definition does represent a deviation from the high standard set in the 2020 Code regarding the systematic inclusion of sustainability factors in investment stewardship.
Delivering information to investment decision-makers in an accessible and easily comparable manner is paramount. So, it would be preferable to see the ‘one-stop shop’ reporting under the existing Code retained. Permitting references to such external information could be helpful, as long as reports under the Code continue to tell a coherent and meaningful story to report users without forcing them to read several documents in parallel to gain an understanding of a signatory’s stewardship approach.
Removal of escalation principle ‘unnecessary’
Sawan Wadhwa, head of stewardship, Evenlode Investment
Evenlode Investment contributed to the FRC’s consultation through our Independent Investment Managers’ Initiative (IIMI) membership. The UK Code is best-in-class and, therefore, we agree that a revision is necessary, given the current market landscape.
We broadly support many of the proposed changes, particularly the reduction in the frequency of policy statement reporting and the streamlining of reporting requirements. However, the removal of ‘escalation’ as a standalone principle was unnecessary. Escalation is an important tool for effecting positive change at a company level. Keeping it as a separate principle would reinforce its importance and allow the industry to learn from one another.
Regarding the amendment to the definition of stewardship, there’s a need to attract a broader range of signatories and we appreciate the change will allow for more flexibility to accommodate different mandates. However, we do not agree with the de-emphasis or removal of environmental and societal benefits from the definition. Given the current context, this change is poorly timed and does not align with the broader direction of responsible investment. It also fails to do justice to the important role that effective stewardship can have in supporting the economy, the environment and society.
‘We would have been content to see no significant change’
Paul Lee, head of stewardship and sustainable investment strategy, Redington
We welcome the FRC’s approach to the consultation on the Stewardship Code, and think they have been exceptionally thoughtful and open in the process, seeking broad input from across the stewardship chain.
We responded mainly as consumers of Stewardship Code reporting – we see reports as a valuable insight into fund manager approaches to stewardship and actively use the reports to assist our clients in understanding the varying quality of stewardship delivered by managers. The current Code works well, allowing us to distinguish good stewards from weaker ones, and are keen that there is no reduction in the utility of Code reporting.
We would therefore have been content to see no significant changes. But we recognise that the FRC’s proposals are mainly intended to address some of the behavioural issues with fund managers adding more and more reporting to limit the risk of failing to achieve signatory status. The streamlining of the principles should help with that, moving reporters away from a tick-box principle-by-principle form of reporting to simpler and less repetitive reports. That was always possible but the restructuring should give managers more confidence in doing so.
