FRC releases revised UK Stewardship Code

The new UK Stewardship Code launched by FRC, which will be effective on 1 January 2020, shows the changing requirements for investors by addressing wider problems for businesses. It focuses on sustainable and responsible investment and stewardship which highlights its higher standard in comparison to the 2012 revised version.

In FRC’s own words, the new Code looks to establish: “a clear benchmark for stewardship as 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.”

The FRC’s Chief Executive, Sir Jon Thompson, said: “I encourage institutional investors, asset managers and their service providers to sign up to the new Code and demonstrate that they are operating across their businesses to these high standards of Stewardship.

“The FRC will be holding signatories to account by regular review of adoption of the new Code and the quality of the reporting against its principles. Asset owners and beneficiaries will then be able to see if those investing on their behalf are doing so in accordance with their needs and views.

“They will also be able to see the impact of their manager’s decisions, particularly in relation to environmental, social and governance issues, including climate change.”

The new Code plays a key part in the revision of the UK’s corporate governance framework, which began with the introduction of the new Corporate Governance Code in January 2019.

Along with this, it aims to cover the interests of savers and pensioners in the UK by making sure their money is well managed, focusing on producing long-term value and considering client needs.

Key changes

Changes in the new Code include:

• Focus on asset owners, such as pension funds; insurance companies; services providers; and asset managers. In the interest of end-investors and beneficiaries, this will help align the approach of the whole investment community.
• A requirement to report each year on both stewardship activity and its outcomes. This includes reports from signatories which will inform what has been done in the previous year and what the outcome was, along with their engagement with the assets they invest in, their voting records and finally how they have protected and strengthened value of their investments.
• Environmental, social and governance factors will need to be considered by signatories whilst ensuring decisions in investments are aligned with client needs.
• They are also required to show how they exercise stewardship through asset classes beyond listed equity, including fixed income, private equity and infrastructure, and in investments outside the UK.
• Signatories must define the purpose of their organisation, along with their investment beliefs, strategy and culture and how these enable them to practice stewardship. They are also expected to reveal how they are following this commitment through appropriate governance, resourcing and staff incentives.

Investors and services providers supporting signatories serve as key guardians of financial markets, as well as looking after investments in their portfolios.

In response to the release of the new Code, the Chartered Institute of Internal Auditors outlined the impact of the revised version on internal audit.

Dr Ian Peters MBE, Chief Executive of the Chartered IIA, said: “We welcome the publication of the FRC’s UK Stewardship Code which will help set high standards for effective financial stewardship. Internal audit will now need to step up in order to provide assurance on the principles contained in this new UK Stewardship Code.

“Currently, the Institute is consulting on a draft Internal Audit Code of Practice which is aimed at strengthening corporate governance by boosting the status, standards, scope and skills of internal audit.”

Toward transparency

The new Code also promotes the collaboration between signatories and regulators, along with industry bodies whilst identifying and responding to the risk of market failure and failure of the system.

Many have stressed that it raises transparency and integrity within business by providing benefits for the economy, the environment, and society, emphasising the UK’s position as a harbour for long-term, sustainable investment.

Elaborating on this idea, Business Secretary Andrea Leadsom said: “The Government is committed to making the UK the best place in the world to work and grow a business.

“This Code is an important piece of work by the Financial Reporting Council under its new leadership. It recognises the essential role of effective stewardship in supporting stronger corporate governance, diversity and social environmental priorities. I urge asset managers and owners to lead by example and sign up.”

Simon Dingemans, Chair of FRC, added: “This new Stewardship Code marks a step-change in the expectations for investors, their advisors, 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.

“We are looking for widespread adoption by the investment community, reinforcing the attractiveness of the UK as a place to do business and delivering real benefits to the economy, the environment and society more broadly.”