FRC revamps UK Stewardship Code with new report obligation

Prospective signatories of the UK Stewardship Code face a new reporting requirement and will soon have to prepare annual stewardship reports, following an update by the Financial Reporting Council (FRC).

In a “substantial and ambitious” review, the 2012 code has been replaced by the UK Stewardship Code 2020, which is built around 12 principles of effective stewardship.

Upon revealing the new stewardship code, the FRC has acknowledged that there has been a significant growth in alternative assets since the 2012 code was published and that ESG issues have become materially important for many investors.

A key part of this new code is a greater focus on transparency standards around stewardship activity and the FRC assessed reporting standards from asset managers, asset owners and service providers. 

This all contributed to an ‘early reporting review’ through which the FRC found evidence of generally strong stewardship activity, particularly in relation to engagement. However, a lack of consistency was also found with some of the code’s principles receiving more attention than others.

To improve such standards, the UK Stewardship Code 2020 is introducing the requirement for annual stewardship reports to be created and published. This means prospective signatories will need to report on stewardship activities undertaken and outcomes achieved, not just stating intent or policy.

Such stewardship reports will have to include full explanations of the structures and processes in place that underpin stewardship decision-making and the approaches taken.

All asset classes and geographies need to be addressed in these reports (even if stewardship approaches differ between these), and there will need to be a greater overall focus on activities and outcomes with specific evidence for each reporting period.

However, the new code has stopped short of prescribing a single approach for how organisations introduce better standards of transparency.

Sarah Wilson, CEO at Minerva Analytics, said: “Stewardship and responsible investment is at a critical cross-roads, not just from a regulatory perspective, but wider public trust in financial services. The report offers some useful signposts for all of us.

“Minerva is fully committed to playing its part, and we see three areas where we can bring our expertise to bear with proven, practical solutions: stock lending, vote disclosure reporting and pooled fund split voting.”

As well as improving stewardship standards for the benefits of investors and society as a whole, FRC director of corporate governance and stewardship David Styles insisted more needs to be done due to help the UK economy exit the current recession.

“The new UK Stewardship Code sets a high standard for responsible investment and signatories have an important role to play in supporting the Covid recovery,” said Styles. 

“We are encouraged by the number of investors who have engaged with the spirit of the Code and used it as a framework to review their practices and reporting. We encourage others to do the same.”

The webinar recording of the UK Stewardship Code Review of Early Reporting, hosted by the FRC to coincide with the launch of the Review, is available here. The key findings were presented, followed by a Q&A session, which allowed the attendees to ask questions about applying and reporting on the Code.

The FRC will begin accepting applications from signatories to the new code in the first quarter of 2021 (asset managers looking to apply need to do so by 31 March).