Revising the UK’s Stewardship Code

Asset managers in the UK will face strengthened expectations for stewardship and stricter public reporting requirements under revisions to the Stewardship Code that are expected to be finalised this summer.

The Stewardship Code — introduced in 2010 by the UK’s Financial Reporting Council (FRC) as part of the response to the 2007–2008 global financial crisis — is in the final stages of an update.

The FRC’s consultation on the proposed 2019 Code ended on 29 March, and its publication is anticipated this summer, barring significant changes resulting from the consultation. The Code was last revised in 2012.

Under the FRC rules, all UK-authorised asset managers are required to commit to the existing Code or explain why it would not be appropriate for their business model to do so.

The proposed new Code, the FRC’s chair Sir Win Bischoff said, “sets both higher expectations for stewardship practice and introduces more rigorous public reporting with a focus on outcomes and effectiveness”.

Focus of change

The FRC sets out three areas of change. They are:

• Purpose, values, and culture. Investors must report how their purpose, values, and culture enable them to meet their obligations to clients and beneficiaries. This change aligns the Code with the UK Corporate Governance Code published last year.
  
• Recognising the importance of ESG factors. Those signing up to the Code are expected to take material environmental, social, and governance (ESG) issues into account when fulfilling their stewardship responsibilities.
  
• Stewardship beyond listed equity. Investors would be expected to exercise stewardship across a wider range of assets where they have influence and rights, in the UK and globally.

Paul Druckman, chair of UK insurance broker The Clear Group and a former FRC board member, said there is a fundamental change in the definition of stewardship in the new Code. It replaces the old language of “users and investors”, he said, with “beneficiaries, economies, and society”. He added: “That is a material and fundamental change if it is taken in the vein it is truly meant.”

“The whole ‘purpose’ discussion is very relevant at the moment, and the Stewardship Code … moves us into that realm quite significantly for the capital market.”

Other jurisdictions

Since 2010 other countries have adopted their own stewardship codes, using the UK Code as a basis. These jurisdictions include Denmark, Hong Kong, Japan, Kenya, Malaysia, and South Africa.

In Europe, the European Council adopted a revised Shareholders’ Rights Directive in 2017, and a number of other countries including the US have similar investor-led best practice guidance.

Druckman said: “The new Stewardship Code takes us into another realm of thinking — I would be very surprised if other parts of the world didn’t take [it] on board.”

“There are various versions happening in Asia and in some European countries. It is catching on across the world as a concept.”

Previous stewardship codes, he said, have seen investors as one homogeneous group. “The way the [new] Code breaks down the asset owners and asset managers is a very innovative template,” he said.

David Hackett, technical manager at the Association of International Certified Professional Accountants who leads on governance issues, said: “There is traditionally a low incentive for asset managers to engage and support companies to achieve long-term success for all stakeholders.”

The Association, in its response to the FRC consultation, said the Code should cover not only stewardship policies but the actual delivery of stewardship. “Signatories should commit to explain the buying or selling of stock on the grounds of long-term stewardship objectives and encourage investors to use the threat of sale to engender change.”

Meanwhile, a piece of CIMA-funded research — Is the Stewardship Code Fit for Purpose? — led by Julia Mundy, Ph.D., at the University of Greenwich in the UK found that while the existing Code fosters discussions and good intentions, its impact on action in the marketplace is more limited.

This survey mainly of fund managers, analysts, and ESG managers, as well as other experts, found that asset managers’ engagement with investee companies is not characterised by the “purposeful dialogue” that underpins the existing Code’s intended aims. 

That meant, the researchers found, that “divestment of a shareholding, rather than engagement, is the preferred action when faced with concerns about a company”.

The FRC’s proposed new Code reinforces and expands the role of ESG.

Hackett said ESG disclosures currently show a lack of homogeneity and “it is therefore important that the revised Code seeks to foster development of comparable ESG measures as a basis for sound investment”.

The new Code should also, Hackett said, dovetail with the International Integrated Reporting Council’s Integrated Reporting Framework, which emphasises the importance of different types of capital beyond financial capital.

Hackett also welcomed as “positive” the proposed extension of the Code’s scope beyond equities, which would “further encourage sustainable investment for the long term”.

The proposed revised UK Stewardship Code can be viewed at the FRC’s website.

— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.