On 22 July 2024, the Financial Reporting Council (FRC) announced several immediate revisions to the UK Stewardship Code 2020 in order to reduce reporting burdens on existing signatories. It also set out five priority areas that it will focus on in its ongoing review of the Code. According to the FRC, the changes are intended to ensure that the Code is supporting UK capital markets, reducing reporting requirements and driving better stewardship outcomes.
The changes to reporting are likely to be broadly welcomed by existing signatories to the Code as a more proportionate application of the requirements. However, it seems clear that the FRC’s focus remains on ensuring the Code continues to reflect high quality stewardship and reporting standards for those investing money on behalf of UK savers and pensioners.
Enhancing responsible allocation, management and oversight of capital
First published in 2010, the UK Stewardship Code is designed to enhance the responsible allocation, management and oversight of capital. It sets high stewardship standards for asset managers and asset owners, as well as for the service providers that support them. In particular, the Code aims to promote long-term value creation and sustainable benefits for the economy, the environment, and society.
The Code was substantially revised following a consultation in early 2019. The UK Stewardship Code 2020, published on 23 October 2019, took effect on 1 January 2020. The Code sets out 12 ’apply and explain’ Principles for asset managers and asset owners, and a separate set of six Principles for service providers.
The revised Code places ESG at the centre of effective stewardship by recognising that ‘Environmental, particularly climate change, and social factors, in addition to governance, have become material issues for investors to consider when making investment decisions and undertaking stewardship’. In particular, Principle 1 for asset owners and asset managers references signatories’ purpose, investment beliefs, strategy, and culture enabling stewardship that creates long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society, whilst Principle 7 requires systematic integration of stewardship and investment, including material environmental, social and governance issues, and climate change, to fulfil signatories’ responsibilities.
A voluntary Code underpinned by a broader regulatory framework
While the Code is voluntary, it is underpinned by a broader regulatory framework for stewardship in the UK. In particular, the FCA requires asset managers and insurers to state whether they comply with the Code and, if not, to set out an alternative investment strategy. Insurers, reinsurers and asset managers are also required to explain how they have implemented an engagement policy for their listed equity investments.
To become a signatory to the Code, organisations must submit a Stewardship Report to the FRC setting out how they have applied the Code in the previous 12 months. If the report meets the FRC’s expectations, the organisation will be listed as a signatory to the Code. Organisations must report annually to remain signatories. The signatory list was last updated on 22 July 2024. There are currently 287 signatories, representing £50.1 trillion in assets under management. This includes 196 asset managers, 72 asset owners, and 19 service providers.
What is changing?
In February 2024, the FRC announced the launch of a fundamental review of the Code to ensure it supports the growth of the UK capital markets and the UK’s competitiveness.
Following extensive engagement with over 1,500 stakeholders in early 2024, the FRC has announced five immediate changes to reduce the reporting burden on signatories to the Code and five themes that it will focus on in the new phase of the review of the Code.
Immediate changes aimed at reducing reporting burdens
The FRC is making certain interim changes to significantly reduce the reporting burden on existing signatories. These changes will be effective for existing signatories for the next application deadline of 31 October 2024 and will apply until a new Code is implemented in 2026. New applicants will be required to submit a full report corresponding to all Principles and reporting expectations of the Code.
Whilst existing signatories are not required to apply the following interim changes, they may do so if they wish:
- Context reporting: Removal of the requirement for existing signatories to update disclosures on ‘Context’ reporting expectations, except where there are material changes to previous disclosures.
- Activity and Outcome reporting: Removal of the requirement for existing asset owner and asset manager signatories to disclose against ‘Activity’ and ‘Outcome’ reporting expectations for Principles 1,2,5 and 6, except where there are material updates.
- Cross-references: Allowing existing signatories to cross-refer to specific disclosures made in their most recent Stewardship Report (with no need to repeat this in their new report) where there have been no material changes.
The FRC has also provided two clarifications of expectations for all applicants and signatories:
- Clarification of what is considered an ‘outcome’ for stewardship purposes. Outcomes could refer to how engagements have informed investment decisions, or they could reference changes made by an issuer as a result of engagement. They can also be demonstrated by positive, constructive and ongoing engagement with issuers. Engagements do not need to have concluded during the reporting period in order to be considered an outcome; applicants can report on an ongoing engagement, together with reflections on progress and next steps.
- Reminder that collaborative engagement (Principle 10) and escalation (Principle 11) need only be undertaken ‘where necessary’, as signatories may not have reason to undertake these every year. In particular, it is noted that applicants do not need to undertake collaborative engagement or escalation unless it is conducive to achieving their stewardship objectives.
The FRC will write to existing signatories individually to inform them of how these changes impact them.
Whilst these interim changes may have been unexpected, they reflect concerns raised by investors relating to challenges with reporting under the Code and are likely to be welcomed by existing signatories to the Code.
Key themes for review of the Code
The FRC also announced that it will focus on the following five themes in the new phase of the Code’s revision:
- Purpose: The FRC will develop an updated definition of stewardship in light of stakeholders’ concerns that the existing definition can lead to the focus of stewardship activity being interpreted as the pursuit of interests beyond long-term value creation.
- Principles: The FRC is exploring a model that would enable signatories to report against the Code in a way that recognises differences in operating models. In particular, it will explore how the Principles may better reflect the wide range of assets signatories invest in. The FRC is looking at ways the Principles and reporting expectations could be streamlined.
- Proxy advisors: The FRC is carefully considering how the Service Providers Code might support greater transparency of the activities of proxy advisors, in response to concerns expressed regarding their influence.
- Process: The FRC will propose further measures to reduce the reporting burden currently associated with being a Code signatory, whilst at the same time ensuring the information included in reports is useful and accessible to all underlying investors and other stakeholders.
- Positioning of the Code: The FRC is working closely with other regulators such as the FCA, the Department for Work and Pensions (DWP) and The Pensions Regulator (TPR) to consider the impact of multiple regulatory requirements and avoid any duplication that signatories may encounter.
Next steps
The FRC will launch a formal public consultation on the Code later this year, but given the significance of the changes outlined above, the FRC is hosting further focused engagement with stakeholders during August and September this year. The FRC will welcome stakeholder input and engagement on these topics throughout this initial process and during the formal consultation later this year.
The revised Code is expected to be published in 2025, with formal implementation of the new Code being planned for 2026.
