FRC and FCA target new, rigorous stewardship regime,
SRDII implementation begins, ESG resourcing questioned

In the latest round of consultations and discussion documents, the UK’s governance and financial markets regulators have laid out their “substantially higher expectations for investor stewardship policy and practice.”

Having engaged with 170 members of the investment community, the FRC’s proposed Code has been significantly restructured and now includes a focus on effectiveness of the stewardship and how the investment community can deliver sustainable value for investors, economy, and society.

Key Stewardship Pillars

The new Stewardship Code focuses on two key pillars:

•  Purpose, values and culture. Investors must report how their purpose, values and culture enable them to meet their obligations to clients and beneficiaries. This aligns the Code with the UK Corporate Governance Code and encourages embedding behaviour conducive to effective stewardship in the investor community.
• Recognising the importance of ESG factors. The proposed Code now refers to environmental, social and governance (ESG) factors. Signatories are expected to take material ESG issues into account when fulfilling their stewardship responsibilities.
• Stewardship beyond listed equity. The proposed Code now expects investors to exercise stewardship across a wider range of assets where they have influence and rights, in the UK and globally.

As well as new definitions and responsibilities, the Stewardship Code now has a new structured modeled on the UK Corporate Governance Code, with numbered Sections, Principles and Provisions accompanied by Guidance.

Tailored Guidance for Different Market Segments

The Code is applicable to a range of market actors – asset managers, owners and service providers, including proxy advisors. In line with SRDII, all signatories will be required to provide more detailed reporting on their stewardship activities and how effectively they have achieved their stated objectives.

Implementation Limitations

The joint FCA/FRC discussion paper provides a deep dive into the background and rationale for the new Stewardship Code, including clear explanations of the impact of the Shareholder Rights Directive II and associated guidance and regulations from tPR and DWP.

With echoes of the FCA’s recent review of investment consultants, the FCA has flagged the role of the proxy industry as potential cause for concern noting that:

•  “Limited competition and scrutiny may lead to low-cost provision of voting recommendations, inadequately tailored to investors’ financial interests”
•  “Insufficient transparency of how proxy advisers’ voting recommendations reflect investors’ interests over their investment time horizon”; and
• “Market discipline may potentially be weakened by the fact that the market for proxy advisory services is highly concentrated, with the sector dominated by two providers” .

None of these issues are particularly new for those in the ESG and proxy research space, however it is the first time that possible market failure issues have been so openly discussed by a European regulator. Minerva will address these concerns directly in its response to the two consultations later this year.

Useful Links

• FRC Stewardship CodeConsultation
• Joint FRC & FCA Discussion Paper DP 19/1
• FCA Consultation Paper CP 19/7
• Minerva SRDII Briefing