By Robin Hamaker-Taylor
The UK Financial Reporting Council (FRC) has issued a revised Stewardship Code this November, following a public consultation in March 2019. The new Code takes effect from 1 January 2020 and now takes into consideration the fact that since the last revision in 2012, climate change, environmental, social and governance issues have all become material issues for investors to consider when making investment decisions and undertaking stewardship.
The Code does not prescribe a single approach to effective stewardship. Instead, it allows organisations to meet the expectations in a manner that is aligned with their own business model and strategy. Stewardship is defined in the new Code 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’. Asset owners, managers, and service providers can demonstrate their good stewardship by using the Code to voluntarily report against a set of Principles.
The Code sets out “apply and explain” Principles for asset managers and asset owners, and for service providers. Reporting expectations are included for each Principle, pointing to information that the FRC expects should be publicly reported in order for the relevant organisation to become a signatory.
It is a notable departure from the 2012 and other previous versions. In particular, it requires signatories to take account of material ESG factors, including climate change, when fulfilling their stewardship responsibilities. Asset managers, asset owners, and services providers (‘signatories’) are now required to port on their specific stewardship activities and outcomes over a period of 12 months, rather than just focussing on reporting on stewardship policies. Furthermore, the Code requires signatories to disclose more detailed information around their voting decision-making process and history, as highlighted by law firm Baker McKenzie.
The 12 Principles for asset owners and managers are as follows:
- Principle 1: Signatories’ purpose, investment beliefs, strategy and culture enable stewardship that creates long-term value for clients and beneficiaries leading to sustainable beliefs for the economy, the environment and society.
- Principle 2: Signatories’ governance, resources and incentives support stewardship.
- Principle 3: Signatories manage conflicts of interest to put the best interests of clients and beneficiaries first.
- Principle 4: Signatories identify and respond to market-wide and systematic risks to promote a well-functioning financial system.
- Principle 5: Signatories review their policies, assure their processes and assess the effectiveness of their activities.
- Principle 6: Signatories take account of client and beneficiary needs and communicate the activities and outcomes of their stewardship and investment to them.
- Principle 7: Signatories systematically integrate stewardship and investment, including material environmental, social and governance issues, and climate change, to fulfil their responsibilities.
- Principle 8: Signatories monitor and hold to account managers and/or service providers.
- Principle 9: Signatories engage with issuers to maintain or enhance the value of assets.
- Principle 10: Signatories, where necessary, participate in collaborative engagement to influence issuers.
- Principle 11: Signatories, where necessary, escalate stewardship activities to influence issuers.
- Principle 12: Signatories actively exercise their rights and responsibilities.
The 6 principles for service providers, e.g. investment consultants, proxy advisors, and data and research providers, are as follows:
- Principle 1: Signatories’ purpose, strategy and culture enable them to promote effective stewardship.
- Principle 2: Signatories’ governance, workforce, resources and incentives enable them to promote effective stewardship.
- Principle 3: Signatories identify and manage conflicts of interest and put the best interests of clients first.
- Principle 4: Signatories identify and respond to market-wide and systemic risks to promote a well-functioning financial system.
- Principle 5: Signatories support clients’ integration of stewardship and investment, taking into account, material environmental, social and governance issues, and communicating what activities they have undertaken.
- Principle 6: Signatories review their policies and assure their processes.
Organisations must submit their first Stewardship Reports based on the 2020 Code by 31 March 2021, following which the FRC will publish a list of the first 2020 Code signatories in the third quarter of 2021.
The UK Stewardship Code 2020 is available via the FRC website, by clicking here.
The FRC is the UK’s regulator of auditors, accountants and actuaries, setting out UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work. It also monitors and takes action to promote the quality of corporate reporting and operates independent enforcement arrangements for accountants and actuaries.
More information about the 2019 Stewardship Code consultation and subsequent Feedback Statement are available from the FRC website, by clicking here.