FRC Reworks Stewardship Definition In More Demanding Code

The UK’s Financial Reporting Council (FRC) has unveiled the final version of the new Stewardship Code, confirming that investors would face “substantially higher” standards as its signatories.

Expectations have changed since the Code was last revised in 2012 and there have been “significant developments in sustainable and responsible investment and stewardship”, which the 2020 Code reflected, it said.

Simon Dingemans, chair of the watchdog, said the new framework was “a step-change”.

“It is an ambitious revision that strengthens the UK’s standards of governance, transparency and clear reporting,” he said. “We are looking for widespread adoption by the investment community, reinforcing the attractiveness of the UK as a place to do business and delivering real benefits to the economy, the environment and society more broadly.”

Key changes, according to the FRC, include an extended focus that takes in asset owners and service providers as well as asset managers, and a requirement to report annually on stewardship activity and its outcomes.

“Signatories’ reports will show what has actually been done in the previous year, and what the outcome was, including their engagement with the assets they invest in, their voting records and how they have protected and enhanced the value of their investments,” said the FRC. “This greater transparency will allow clients to see how their interests are being served.”

Signatories will also be expected to take environmental, social and governance factors, including climate change, into account. As trailed, they will also be expected to explain how they exercise across asset classes beyond listed equity, which has been the focus so far, and in relation to investments outside the UK.

Those adopting the Code will also need to explain their organisation’s purpose, investment beliefs, strategy and culture.

FRC commended for engagement effort

Faith Ward, chief responsible investment officer at Brunel Pension Partnership, one of the UK’s eight local authority pension fund asset pools, said it welcomed the new Code, and that the FRC should be commended for having carried out a “phenomenal” amount of engagement with the investment industry.

“Additional transparency is absolutely the right direction of travel.” 

Faith Ward, chief responsible investment officer at Brunel Pension Partnership

The additional transparency called for by the new framework would help increase accountability on specific actions and outcomes from stewardship activities and whether these delivered real change, she said.

“This will bring some short-term pain in terms of increasing the workload, but in the long-term this is absolutely the right direction of travel.” 

A slightly sceptical reaction came from Martin Webster, partner at Pinsent Masons, who said that despite encouraging elements, “it is questionable whether it does enough to remove the risk of boilerplate reporting”.

“And, with at least half the value of the UK stock market held by overseas investors, it is unclear how much notice they will take of these new, more onerous, but still voluntary provisions.”

Stewardship definition tension

Arguably the most challenging item the FRC had to deal with in finalising the new version of the Code was the definition of stewardship, which it has revised from that proposed in its consultation earlier this year.

The new code defines it 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”.

This adds an explicit reference to the environment, and specifies that the value to be delivered for clients and beneficiaries should be long-term.

“The FRC has landed in a good place”

Ingrid Holmes, head of policy and advocacy at Hermes Investment Management

Ingrid Holmes, head of policy and advocacy at Hermes Investment Management, said the end result was positive.

“We went back and forth on this debate for months and months,” she told IPE. “The FRC has landed in a good place.

“What the FRC has done with the new definition is to basically create a sub-clause around the idea of economy and society affecting outcomes for clients, which helps people feel more comfortable around what might have been potential fiduciary conflict.”

The draft 2020 Stewardship Code defined stewardship as “the responsible allocation and management of capital across the institutional investment community, to create sustainable value for beneficiaries, the economy and society”. The UK’s asset management association rejected this definition, saying it conflicted with managers and owners’ fiduciary duty.

Nearly all of the 102 respondents to the consultation commented on the proposed definition, with half saying that the primary purpose of stewardship was to deliver financial returns for clients, and a third commenting that having regard to the economy and society in investment decision-making was necessary to properly fulfil their fiduciary duty.

One asset owner expressed “a little” disappointment about the final definition, but said the FRC had tried to find a sensible compromise and had ended up with a pragmatic solution.