The Financial Reporting Council is consulting on proposed updates to the UK Stewardship Code. These proposals aim to maintain high standards of effectiveness and transparency, without saddling Code signatories with onerous reporting burdens.
Who is the Stewardship Code relevant to?
As the FRC notes, the Code is relevant to a wide range of organisations and these have different rights, responsibilities and influence within the investment chain. They include asset owners, such as pension funds and insurers, and asset managers, as well as those providing services which enable stewardship activities, such as investment consultants and proxy advisors. Approximately 40% of those signed up to the Code are headquartered outside the UK.
As the effects of stewardship activities are felt by businesses, the Code’s revised recommendations are also relevant to large investee companies and issuers.
Purpose of the Code and the definition of stewardship
The FRC states that the aim of the Code is to promote long-term value for savers and pensioners through the effective management of investments on their behalf. There is no single approach to exercising effective stewardship and the Code’s role is to encourage transparency about policies and practices, not to dictate how signatories should invest their assets.
In line with this statement of the Code’s purpose, the FRC is also proposing to amend the introductory wording to clarify that stewardship should create long-term sustainable value for clients and beneficiaries. It “may” also, but does not necessarily need to, lead to wider benefits for the economy, the environment and society.
For more discussion of this issue, see also our Sustainable Futures blogpost.
Engagement with companies and escalation of issues
The FRC intends to streamline existing principles to clarify that, whilst collaboration amongst investors and the escalation of issues with companies are important stewardship tools, these will not fall to be deployed every year, and escalation should not become an end in itself. This clarification should be helpful for both institutional investors and their investee companies.
Proxy advisors
In addition, many listed companies have concerns about how providers of proxy services carry out their analysis of an issuer’s governance and AGM proposals in order to produce reports for investors and, often, voting recommendations. In particular, issuers feel that there is a disconnect between the flexibility of complying or explaining with the FRC’s best practice recommendations in the UK Corporate Governance Code and the apparently rigid checklists that may be applied by proxy advisors. The FRC is seeking to address these issues, within the powers that it has, with a greater focus on proxy advisors, the quality of their reports and the access to engagement that they allow for. Tailored Service Provider Principles in the revised Code would for the first time distinguish between proxy advisors and investment consultants.
Reporting processes
The proposed changes would significantly reorder and streamline the existing 2020 version of the Stewardship Code. They will also establish a new process for FRC evaluations to focus on annual reports on activities and outcomes, rather than on areas of less frequent change, such as ongoing policies. The FRC is also planning to include new prompts and guidance for signatories to the Code to help them to produce meaningful reporting.
Background
The most recent version of the Code was introduced in 2020 alongside a broader focus on stewardship from the Financial Conduct Authority, as well as the FRC. The FRC has been reviewing the quality of stewardship reporting over the last four years and committed to a fundamental review of the Code in 2023. Interim changes and a policy statement were published in July 2024.
Timing
The consultation runs until 19 February 2025. The updated Stewardship Code is expected to be published in the first half of 2025 with an effective date of 1 January 2026. Current signatories to the 2020 Code should plan to report as usual in 2025 to maintain their status as acknowledged signatories. First reports against the new Code can then be submitted to the FRC in 2026.
More information
The consultation is available here and the press release here. The FRC intends to host a series of engagement events during the consultation period to gather feedback from stakeholders. A list of FRC roundtables is available here.
For further information, please contact:
Wilma Rix, Linklaters
wilma.rix@linklaters.com
