UK Stewardship Code to Benefit from Fine-tuning

Review welcomed as an opportunity to streamline, clarify and raise standards, including greater tilt toward portfolio-level approaches.  

A review of the UK Stewardship Code 2020 should prompt evolution rather than revolution, according to industry experts, who want to see refinement aimed at further improving outcomes.  

The UK’s Financial Reporting Council (FRC) recently revealed plans to conduct a fundamental review of the code to ensure it supports economic growth and UK competitiveness.  

The watchdog will be seeking views from stakeholders on whether the code is being used by signatories to drive better stewardship outcomes, including the extent to which it supports long-term value creation through appropriate engagements, creates reporting burdens on issuers or signatories, and has led to any unintended consequences, such as short-termism in targets and outlook for issuers. 

The review should focus on streamlining, clarifying and raising standards so the code better fulfils its purpose of promoting responsible investment practices, said Samantha Chew, Stewardship Lead at insurer and pension provider Aegon UK. 

“We expect any enhancements to be an evolution and not a revolution,” she told ESG Investor. 

One potential change could see a greater emphasis on macro or system stewardship. This might require signatories to report not only on the impact of stewardship on individual issuers, but also on the impact of stewardship on portfolio-level and economy-wide outcomes.  

“There could be more transparency on how difficult it is to make or implement a [stewardship] decision – how you balance different stakeholder needs and short-term requirements alongside long-term outcomes and stakeholder benefits,” posited Hilkka Komulainen, Aegon UK’s Head of Responsible Investment. 

“There is already a [code] principle that looks at systemic risk, but we would welcome consideration of this not only as a risk management issue but a stewardship issue,” she added.  

The FRC’s Stewardship Code, which was last updated in 2020, currently requires signatories to “identify and respond to market-wide and systemic risks” to promote a well-functioning financial system.  

There is also opportunity to further clarify the definition of engagement, according to Chew, to reduce duplication between principles, such as nine and 12 concerning voting and engagement. 

“We also think reporting requirements may not currently be very well adapted to asset owners like us, who do not undertake voting and engagements with companies ourselves,” she said. 

Further guidance on the application of stewardship outside equities would be welcome for defined contribution pension schemes that are increasing their private market investments, added Chew.  

There are currently 273 signatories to the code who collectively represent £43.3 trillion (US$54.7 trillion) in assets. This includes 66 asset owners. 

Working together 

Additionally, a review of the UK code offers scope to increase its alignment with other guidance for investors on using stewardship as part of sustainable investment strategies.  

Last year, the Net Zero Asset Owner Alliance (NZAOA) published a paper on asset managers’ net zero engagement strategies, which identified four principles for engaging with investee companies on climate. 

“We [at the NZAOA] engaged with the FRC when developing [this paper],” said Komulainen. “There is opportunity for the FRC to shift its definition of engagement to align with a more outcomes-focused approach.” 

Paul Chandler, Director of Stewardship at the UN-convened Principles for Responsible Investment (PRI), said the organisation hopes to work with its signatories and the FRC toward “further integration of the code alongside wider policies that drive an economy-wide sustainability transition”. 

The FRC said it will engage closely with other regulators throughout the review. This includes the Financial Conduct Authority, which sets the regulatory framework for asset managers and owners, as well as the Department for Work and Pensions and The Pensions Regulator.

The review will be undertaken in three phases: targeted outreach focused on the four main groups, including asset managers and owners; a public consultation after the 2024 proxy season; and the publication of the revised code in early 2025. 

The existing iteration will operate as usual throughout the review process, the FRC said. Existing signatories will be required to submit their renewable applications to remain a signatory. 

Taking stock  

To date, the code has been largely beneficial to investors’ approach to responsible stewardship, according to Komulainen from Aegon UK.  

“It has helped to lead behaviour away from box-ticking towards adopting best practices because it’s principles-based and competitive,” she said. “Asset owners feel a need to keep evolving, year on year. The reputational impact for any investor who drops out can be quite significant.” 

FRC-commissioned analysis of use of the code found that it has had an overall positive impact on the quality of oversight over assets. It noted that asset owners and managers were increasing their volume and range of stewardship and engagement-related activities, broadening out the spectrum of interlocuters. 

But some have queried the extent of the code’s effectiveness so far.  

In a 2022 paper, Anna Tilba, Professor in Strategy and Governance at Durham University Business School, analysed US asset manager BlackRock’s reporting to find that there was a tension between the asset manager’s commitment to ESG in its public statements and translating this commitment into tangible outcomes through its voting, ESG investments and stewardship report. Tilba, who was one of the researchers for the FRC analysis, found tangible outcomes “seem[ed] to be more assumed than demonstrated”. 

More broadly, she said, it remains difficult to attribute engagement success to a particular organisation, especially as investors become increasingly collaborative in their approach to stewardship. 

“There are also issues around data quality, multitude of reporting initiatives and a lack of agreed standards between these,” Tilba said. 

She welcomed the scope of the FRC’s planned review, but noted its quality would depend on the comprehensiveness of the evaluation, the depth of analysis, and the extent of stakeholder input.  

“It will also be important to see whether this review will provide actionable recommendations for enhancing the effectiveness of the code as a result,” Tilba said. 

No need for urgency

Other quarters have questioned whether there is a clear need for a major overhaul at this time. 

“[The code] is functional, it’s driving better delivery by managers on behalf of their clients, and it is providing useful insights into that delivery,” said Paul Lee, Head of Stewardship and Sustainable Investment Strategy at investment consultancy Redington.  

While asset manager responses could be enhanced, that isn’t necessarily a failing of the code, Lee explained. “In many ways, it sets a challenge for asset owners in holding their managers to account for better delivery. 

“If there is to be a review, then a slow-paced one that really seeks to understand the good and the less good of stewardship and how the distinction can be made more transparent would be helpful,” said Lee. “There’s no need for urgency and no need for wholesale change. A process that allows considered thought offers the best chance of helpful progress.” 

The long-term future of the FRC itself is open to question due to longstanding difficulties in the oversight and regulation of audit quality. The government has proposed replacing the body with the Audit, Reporting and Governance Authority (ARGA), but its plans have been delayed. 

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