The UK FRC recently launched a public consultation on proposed revisions to the Stewardship Code. As a technology service provider interested in promoting good stewardship, we have responded to the consultation. This blog post includes our answers to the FRC’s questions, for our stakeholders’ interest.
With the proposed revisions to the Stewardship Code, the UK, as the major financial center it is, keeps the yellow leadership shirt on when it comes to stewardship best practices.
With a comprehensive regulatory framework, and a stewardship code which has been through a couple of revisions, the FRC continues to progress the code alongside evolving industry practice.
Developments center around:
Enhanced definition of stewardship
A streamlined reporting process
Enhanced structure and alignment of principles
New guidance for effective implementation
Questions:
1. Do you support the revised definition of stewardship?
Yes, but with a caveat.
We understand the previous definition of stewardship created some confusion around its interpretation. The revised definition comes with supporting language that investors should account for long-term risks and opportunities, which in short should help them meet client/beneficiary objectives today, without compromising the ability to do so in the future. Further, it states that stewardship then “may” lead to wider benefits for the economy, the environment and society.
Given how present market dynamics enable companies to, in many situations, externalise costs of externalities, negatively impacting the economy, environment and society, should we expect investors to act to prevent this situation and protect the commons on which long-term portfolio returns depend? We would argue they have a fiduciary duty to do so - in their role as intermediaries, stewardship practices should align with clients’ and beneficiaries’ objectives and time horizons.
The revised definition’s aforementioned references to both the future and possible wider benefits, may therefore create confusion as to if this perspective is required in stewardship practice or not? Perhaps here, the reference to “sustainable value”, interpreted from a materiality perspective, aims to guide investors.
In our view, if hard law and regulation is lacking, soft law and stewardship codes can have a gap-filling role to play in shaping expectations. In turn, empowering investors to act as norm ambassadors on business conduct and corporate responsibility.
2. Do you support the proposed approach to have disclosures related to policies and contextual information reported less frequently than annually? If yes, do you support the approach set out above?
Yes. The arguments for the revision makes sense, along with the suggested mechanism to update information should there be interim changes.
3. Do you agree that the Code should offer ‘how to report’ prompts, supported by further guidance?
Yes. Non-prescriptive guidance will help increase readability and benchmarking across asset classes and investor types, important for accountability and trust.
With research suggesting investors spend 20 % of stewardship resources on reporting, there’s certainly work to be done here to streamline expectations, and strive for increased alignment with other reporting regimes.
4. Do you agree that the updated Code for Asset Owners and Asset Managers should have some Principles that are applied only by those who manage assets directly, and some that are only applied by those who invest through external managers?
Yes. Stewardship needs to reflect investors’ unique profiles and investment objectives. Whether you manage your assets in-house and or outsource this does have implications on stewardship practice and levers.
5. Do the Principles of the updated Code better reflect the different ways that stewardship is exercised between those who invest directly, and those who invest through third parties?
Yes. It better separates this, reflecting that for asset owners with primarily external management, - aside from the ability to delegate voting or not and be involved in policy-level engagement - your influence centers instead around the monitoring of managers, ensuring their practices align with your expectations of good asset stewardship over time.
6. Do you agree that the updated Service Providers’ Code should have some Principles that are applied only by proxy advisors, and some that are only applied by investment consultants?
Yes. A clearer separation of the different roles and responsibilities in the investment chain makes sense. The streamlining of principles, while including dedicated principles for different service providers, including proxy advisers, is positive for clarity, and given their influence on markets.
7. Do the streamlined Principles capture relevant activities for effective stewardship for all signatories to the Code?
In large, yes. It is important to consider the various roles of different actors within the investment stewardship ecosystem. These actors contribute to shaping norms, policies, and practices in the investment world, influencing how stewardship is defined and executed.
With developing market practices and (self-)regulation, in striving for improved practices over time, it’s always a balance of flexibility vs prescriptiveness. For example, the increased focus on outcomes and multi-year change perspectives is sound, and will help promote long-termism and a focus on quality over quantity.
8. Should signatories be able to reference publicly available external information as part of their Stewardship Code reporting, recognising this means Stewardship Code reports will no longer operate as a standalone source of information?
Yes. It should be a priority for all stakeholders to alleviate the reporting burden, so that signatories may focus more on what matters (- good stewardship). It therefore seems necessary to enable cross-referencing, to avoid duplication across documents which is significant at the moment.
As noted in the Consultation document, guidance on best practice use by the FRC will be important to not compromise the quality of reporting. It’s difficult however to see how this will not impact negatively on the quality of disclosures, but stakeholders should remember then the purpose of simplified disclosure practices.
9. Do you agree with the proposed schedule for implementation of the updated Code?
Yes.