The UK’s Financial Reporting Council (FRC), an independent regulator, released its revised stewardship code last Thursday. The UK Stewardship Code 2020, which takes effect on 1 January, is a significant and ambitious revision to the 2012 edition of the code that sets high expectations on UK institutional investors and service providers.
The revised stewardship code differs from its predecessor in several areas, detailed below, and a number of the revisions encourage practices that are conducive of long-term investment and business decision-making:
- Defining stewardship.The UK Stewardship Code 2020 broadens the definition of stewardship to 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. While this definition of stewardship is broader than the one in its predecessor, it is narrower than the definition proposed in its consultation in January, which sought to create value for the economy and society as well. The final definition was honed over a comment period that ended in March, as well as through a significant amount of engagement with the investment management industry, which sought to maintain focus on fiduciary duty.
- Scope. The revised code spans asset classes and geographies1, while its predecessor is limited to UK listed equities. The revised code’s provisions on fixed income ownership rights and responsibilities are significant given the relatively large size of the fixed income market. It also reflects the growth in investment in assets other than listed equities since the first UK stewardship code was published.
- Purpose, culture, and values.The revised code requires that institutional investors be clear on their purpose, culture, and values. Its predecessor only examined the culture of its listed holdings.
- Fiduciary duty.The revised code takes fiduciary duty a step further than simply taking into account client and beneficiary needs. It requires signatories to disclose the length of the investment time horizon they considered appropriate to deliver to the needs of clients and beneficiaries, as well as to explain any lack of alignment with clients’ stewardship and investment policies. Prior versions did not require these types of disclosure.
- ESG.The revised code joins 14 other global stewardship codes—out of 22 globally—in integrating environmental, social, and governance (ESG) considerations. The FRC explains that environmental —particularly climate change—social, and governance factors have become material issues for investors to consider.
- Implementation.The revised code focuses on implementation in requiring disclosure on how stewardship is resourced and incentivized. This is part of a broader focus on activities and outcomes of stewardship, not just policy statements.
- Market-wide and systemic risks.The revised code requires signatories to explain how they identify and respond to market-wide and systemic risks and how they collaborate with other stakeholders to improve the functioning of financial markets.
The FRC views these revisions as a combination of setting high standards for stewardship and adapting to changes in the investment market since 2012. Properly organized, stewardship codes can be a vital tool for promoting long-term thinking across the value chain, guiding investors and investees toward behaviors that help them see past short-term market vicissitudes and focus on longer-term measures of success. In our view, the revised UK stewardship code is a bold step forward.
To learn more about the updates, please see the differences between the two editions of the UK Stewardship Codes highlighted in this table.