Published: September 18, 2024
The Financial Reporting Council (FRC) recently announced significant updates to the UK Stewardship Code, signalling a new chapter in the evolution of responsible investment and corporate governance. These changes, while largely welcomed, have sparked a robust dialogue among investors and asset managers. As the cornerstone of stewardship in the UK, the Code’s revisions aim to maintain its status as the gold standard while addressing concerns about the burden of reporting.
A Collaborative Effort: Refining the Gold Standard
We have been keenly involved in the dialogue with the FRC, and the latest updates reflect a concerted effort to streamline the Code while preserving its ambition. These interim changes are seen as a positive step forward. They signal the FRC’s commitment to maintaining the Stewardship Code as the benchmark for responsible investment practices.
One of the primary concerns among investors, including us at LGPS Central, has been the growing complexity and burden of reporting. Annual stewardship reports have become increasingly challenging, particularly when it comes to identifying material changes in areas like governance and policy. The recent updates suggest a potential reduction in this reporting burden, a move that has been largely welcomed by the investment community.
However, questions remain. Can these changes go far enough to alleviate the reporting pressures without diluting the Code’s effectiveness? Investors are cautiously optimistic, but the true impact of these updates will only become clear when the next version of the UK Stewardship Code is published.
The Burden of Reporting: A Balancing Act
The burden of reporting has been a common complaint among investors. While the principles of the Code provide a solid blueprint for good stewardship, the practicalities of annual reporting have become increasingly onerous. Many in the industry agree that while the reporting requirements may have become burdensome, the foundational value of the Code remains intact. The challenge now is to strike a balance between thorough, meaningful reporting and the practicalities of producing these reports year after year.
The forthcoming formal consultation will be a crucial moment for the industry. Investors are hoping to see further reductions in reporting requirements and clearer guidance on how to apply the Code across different asset classes. There is also a desire for the Code to continue promoting proportionate reporting, which supports the growth and effectiveness of the UK capital markets.
Clarifying the Role of Engagement and Escalation
One of the more nuanced updates to the Code is the clarification that collaborative engagement and escalation are tools to be used "where necessary," rather than as mandatory components of stewardship reporting. This clarification has sparked debate. The Institutional Investors Group on Climate Change (IIGCC) raised concerns that this could frame these tools as options of last resort, potentially weakening the effectiveness of stewardship.
However, many investors see this clarification as a positive development. It recognises that the approach to stewardship must be tailored to the specific circumstances of each asset class. For instance, while it may be appropriate to question managers on equity investments, long-term infrastructure projects may not allow for the same level of engagement. The key is to ensure that meaningful stewardship is practiced, even if it does not always lead to successful or immediate outcomes.
Context Matters: Sensitivity to Global Circumstances
The FRC's sensitivity to the broader context in which some investors operate, particularly in the US, has also been noted. Collaborative engagement is a cornerstone of effective stewardship, and the FRC’s clarifications on the expected reporting embraces the realities faced by global investors is seen as a strength. This flexibility is vital for the continued relevance and wide adoption of the UK Stewardship Code. As an asset owner, it’s crucial to have a Code that is widely applicable, not just in the UK but globally. The FRC’s approach ensures that the Code remains a driving force in the global investment stewardship ecosystem, promoting transparency and accountability across the board.
Broadening the Definition of Engagement Outcomes
One of the more forward-looking changes in the Code is the broadening of what constitutes a successful engagement outcome. This shift acknowledges that outcomes extend beyond immediate real-world actions by issuers. It’s a change that many investors are keen to explore further.
For those managing long-term investments, particularly on behalf of pension funds, this broader understanding of outcomes aligns more closely with the long-term interests of beneficiaries. It encourages ongoing dialogue and reflection on what effective stewardship looks like in practice, beyond just short-term metrics.
Looking Ahead: The Future of the UK Stewardship Code
As the FRC prepares for a formal consultation on the next version of the UK Stewardship Code, the investment community is watching closely. The interim changes represent a step towards a more streamlined and practical approach to stewardship, but they also raise important questions about how to maintain the Code’s high standards.
Investors are hopeful that the consultation will bring about further clarity and support for the ongoing evolution of stewardship practices. In the meantime, the dialogue between the FRC and the investment community will continue to shape the future of responsible investment in the UK and beyond.
The FRC's recent updates to the UK Stewardship Code reflect both the progress made and the challenges that lie ahead. As investors, asset managers, and regulators navigate these changes, the ultimate goal remains clear: to safeguard the interests of savers and pension holders by promoting transparency, accountability, and effective stewardship in the capital markets.
