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This article was first published in the January 2020 UK edition of Accounting and Business magazine.

The UK’s revised Stewardship Code (the code) comes into effect from the first of this month.

The changes are substantial. Simon Dingemans, chair of the Financial Reporting Council (FRC), which published the code in October 2019, says it ‘marks a step-change in the expectations for investors, their advisers 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.’

The FRC’s latest revision of the code has addressed the concerns that have dogged previous versions (see panel below). It introduces a new, strengthened stewardship agenda that sets higher expectations for the investment community, both in terms of policy and practice.

It is now aligned with recent changes in the governance landscape in the UK and globally, including the UK Corporate Governance Code 2018, the UN Principles for Responsible Investment and the EU Shareholder Rights Directive. The overarching aim of these changes is to promote long-term sustainable success through improved governance and responsible investment. See panel, right.

The code includes an important new definition of stewardship: ‘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 definition establishes a high baseline of expectations on all parts of the investment community.

The code comprises 12 ‘apply and explain’ principles for asset managers and asset owners, covering purpose and governance, investment approach, engagement, and exercising rights and responsibilities. There are six separate principles for service providers.

The code is voluntary. Any organisation applying to become a signatory must provide an annual stewardship report setting out how it has applied the code’s principles during the preceding 12 months, detailing the activities undertaken and the outcomes achieved. The FRC will evaluate the reports against the reporting expectations set out in the code.

Those organisations meeting the expectations will be listed as signatories to the code. In order to be included in the first list, organisations must submit a final report to the FRC by 31 March 2021. Once accepted as a code signatory, the annual stewardship report becomes a public document and must be made available on the signatory’s website.

Critical changes

The code raises the bar significantly in terms of the standards and expectations of stewardship in the UK. Here are five of the most important changes:

  • Integrate ESG factors into investment decisions. Signatories will be expected to take environmental, social and governance factors, including climate change, into account when fulfilling stewardship responsibilities.
  • Focus on purpose, values and culture. Signatories will have to explain their organisation’s purpose, investment beliefs, strategy and culture, and how these enable them to discharge their stewardship obligations to clients and beneficiaries. They will also need to show how they are demonstrating this commitment to stewardship through appropriate governance, resourcing and staff incentives.
  • Extend the focus beyond asset managers. The code now includes asset owners (such as pension funds and insurance companies) and service providers (for example, proxy advisers and investment consultants) for the first time.
  • Sign up to greater transparency. Signatories will be required to report annually on their stewardship activities and their outcomes, including details of their engagement with the assets they invest in, their voting records and how they have protected and enhanced the value of their investments.
  • Demonstrate stewardship beyond listed equity. Signatories will be expected to explain how they have exercised stewardship across asset classes beyond listed equity, such as fixed income, private equity and infrastructure, and in investments outside the UK.

The FRC’s reshaping of stewardship has raised the bar for all those who are involved in investing money in the UK, including those doing so on behalf of individual savers and pensioners. The code is both stronger and clearer as a result, and it appears to be fit for the future too.

Steve Giles is a consultant and lecturer in governance, risk and compliance.