On 24 October 2019, the Financial Reporting Council (‘FRC’) published the UK Stewardship Code 2020 (the ‘Code’) which takes effect for reporting years beginning on or after 1 January 2020.
On announcing the launch of the Code, the FRC’s Chair, Simon Dingemans, said:
This new Stewardship Code marks a step-change in the expectations for investors, their advisors, and how they manage investments for their savers and pensioners. It is an ambitious revision that strengthens the UK’s standards of governance, transparency and clear reporting. 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.”
The UK Stewardship Code 2020
The Stewardship Code is part of UK company law and sets out the principles which institutional investors are expected to follow.
The new Code defines stewardship 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.”
Stewardship activities are wide ranging and include investment decision-making, monitoring assets and service providers, engaging with issuers and holding them to account on material issues, and exercising rights and responsibilities.
This revision to the 2012 edition of the Code sets higher expectations on signatories and will apply to asset owners, asset managers and service providers. Although the Code and reporting on its application are voluntary, the standard set is higher than the minimum UK regulatory requirements.
The FRC’s Chief Executive, Sir Jon Thompson, has said:
I encourage institutional investors, asset managers and their service providers to sign up to the new Code and demonstrate that they are operating across their businesses to these high standards of Stewardship.”
The FRC will be holding signatories to account by regular review of adoption of the new Code and the quality of the reporting against its principles. Asset owners and beneficiaries will then be able to see if those investing on their behalf are doing so in accordance with their needs and views. They will also be able to see the impact of their managers decisions, particularly in relation to environmental, social and governance issues, including climate change.”
The Code comprises of 12 ‘apply and explain’ Principles for asset managers and asset owners plus reporting expectations, and a separate set of 6 Principles, with reporting expectations, for the service providers that support them. The reporting expectations support the Principles by setting out what information signatories should include in their Stewardship Report. The Code does not prescribe a single approach to stewardship, but instead allows companies to meet the expectations in a way that is aligned with their own business model and strategy. Companies can therefore determine which reporting expectations are relevant to their business.
When applying the Principles, signatories should consider the following:
- The effective application of the UK Corporate Governance Code and other governance codes;
- Directors’ duties, particularly those matters under section 172 of the Companies Act 2006;
- Capital structure, risk, strategy and performance;
- Diversity, remuneration and workforce interests;
- Audit quality;
- Environmental and social issues, including climate change; and
- Compliance with covenants and contracts.
The Stewardship Report
The Report only needs to be a single document, and should succinctly outline how the organisation has applied the Code. The Code directs that the Report should “focus on activities and outcomes and provide enough information to enable the reader to have a good understanding of the application of the Code without having to refer to information elsewhere.”
Signatories are required to report annually on what they have done and on the outcomes. However, the FRC does not only want the Report to detail the organisation’s successes, but to “acknowledge setbacks experienced and lessons learned”.
Once the Report has been approved by the FRC, and the applicant has been accepted as a Code signatory, the Report will be a public document and must be made available on the signatory’s website. If they do not have a website, then the Report must be accessible in another form.
Existing signatories to the 2012 UK Stewardship Code will need to submit a Stewardship Report which meets the FRC’s reporting expectations under the new Code, in order to be listed as a signatory to the 2020 Code.
The Need For Change
The investment market has changed significantly since the publication of the first UK Stewardship Code. There has been significant growth in investment in assets other than listed equity, such as fixed income bonds, real estate and infrastructure. These investments have different terms, investment periods, rights and responsibilities and signatories will need to consider how to exercise stewardship effectively in these circumstances.”
In addition, environmental, social and governance factors have become key issues for investors when considering investment decisions and undertaking stewardship. The new Code reflects this in that signatories are expected to consider these issues in their investment, monitoring, engagement and voting.
The changes were strongly supported in consultations, and so it will be interesting to see whether there is a widespread adoption of the new Code as is hoped for by the FRC.