It has been five years since the Financial Reporting Council (FRC) launched the current UK Stewardship Code, now backed by 273 signatories managing more than £4trn in assets.
In this time, the Code has, without a doubt, raised the bar in terms of what it means to conduct effective stewardship in our industry. The Code’s set of 12 principles on which asset manager and owner signatories report annually has helped underpin trust in the market, providing a clear blueprint for transparency and accountability. While its onus is on disclosure (Apply and Explain), it has also led to improved and more rigorous stewardship activity across the industry to the benefit of investors and society as a whole.
Earlier this year, the FRC announced a review of the code “to ensure that that the principles of the Code are still driving the right stewardship outcomes for investors”. In November, it launched its consultation on significant updates to the Code, focusing on supporting economic growth and investment and delivering increased transparency, and looking to streamline reporting requirements and reduce burdens for signatories.
Having just completed our fourth submission against the Code’s principles, we reflect on the strengths of the current Code, and what we would like to see from its next iteration.
Defining stewardship
While the Code’s core purpose – seeking to “promote long-term value for UK savers and pensioners through the effective management of investments on their behalf” – has been a constant, several elements of the Code have evolved over time to reflect changing market practice. One of the most scrutinised changes is the definition of stewardship. Each iteration of the FRC’s definition has had a systemic focus, clearly articulating that effective stewardship equally benefits companies and the ultimate providers of capital.
Building on this, the definition was revised in 2020 to reference the benefits for the economy, the environment, and society. We welcomed this change, as it served as a natural extension of the central systemic focus. However, with the recent politicisation of ESG, this addition has come under pressure throughout the FRC’s consultation. As such, they have subsequently elected to remove the reference, relegating it to the supporting text. We believe this may weaken the high bar set by the Code, and would encourage the FRC to reconsider how these elements can be incorporated.
The importance of collaboration and escalation
Another significant change has been the streamlining of the Code’s principles. In particular, the removal of two principles, with ‘Collaboration’ being brought under engagement, and ‘Escalation’ becoming a supporting factor across the new principles. While we recognise the challenges present in some markets, escalation and collaboration are both critical levers to effective stewardship.
Collaboration recognises that many of the issues we are tackling cannot be solved alone, and without partnering with like-minded investors and organisations we are likely to be far less effective stewards. Escalation, meanwhile, is really where the rubber hits the road in terms of engagement – without escalation, engagement will not have teeth and we’re likely to see little meaningful change.
By removing the requirement to demonstrate collaboration and escalation, we risk managers following suit and placing less emphasis these critical levers. And, while cognisant of geographical and strategic differences, we believe the Code should maintain a high bar when it comes to exercising stewardship.
No one size fits all
The current Code recognises that there is no one-size fits all when it comes to stewardship. Organisations are able to tailor their reporting in a way that best reflects their stewardship approach and the activity undertaken to achieve the best outcomes for their clients. This principles-based approach sits in stark contrast to similar pieces of regulation – including SFDR and SDR – which have taken a far more prescriptive approach to sustainability and stewardship-related disclosures, and run up against well-reported challenges as a result.
In our view, one of the Code’s objectives – to drive high-quality stewardship outcomes and encourage transparency – is best achieved through a non-prescriptive approach. This will ensure that the principles remain relevant to the organisation reporting, and that the information is shared with investors in a proportionate and easy-to-understand way.
With this in mind, we welcome the FRC’s decision to establish distinct principles for different types of signatories,recognising and acknowledging differences in operating models. We also commend the FRC for acting decisively and responsively to reduce the reporting burdens ahead of the new Code being implemented.
Shift the focus from activity to long-term outcomes
The FRC’s reporting expectations on investors’ stewardship activity have played a significant role in ensuring stewardship activity is more meaningful, rigorous, and ultimately to the benefit of the end investor. However, it has also arguably led to a focus on quantifying activity (i.e. number of meetings held with companies) over outcomes (i.e. impact of an engagement on real-world emissions) and – in some cases a drive to demonstrate “quantity” over “quality”.
Effective stewardship is resource intensive, and crucially more “activity” doesn’t necessarily equate to better “outcomes” for people or planet. Stewardship is also a long-term endeavour. With this in mind, it is pleasing to see the FRC recently encourage investors to consider the effects of stewardship over multiple years.
Overall, the FRC’s review of the Stewardship Code is a positive step forward, one which continues to drive leadership in stewardship and better outcomes for investors. We look forward to contributing to the consultation and continuing to support the Code, helping our clients to develop a thorough understanding of the important role stewardship plays in our investment process.
