FRC launches revised ‘green’ UK stewardship code
24 Oct 2019
The Financial Reporting Council (FRC) has published a revised UK Stewardship Code, widening the scope to include pension funds and insurers, and adding new annual reporting requirements
24 Oct 2019
The new Code focuses on outcomes rather than policies, and includes environmental, social and governance issues for the first time.
Key changes include extending the Code’s reach to include asset owners, such as pension funds and insurance companies, and service providers as well as asset managers. The original version and the first revision in 2012, targeted asset managers only.
Signatories will be required to report annually on stewardship activity and its outcomes. These reports will need to show what has actually been done in the previous year, and what the outcome was, including their engagement with the assets they invest in, their voting records and how they have protected and enhanced the value of their investments.
The FRC says this will put an end to ‘boilerplate’ reports which solely outline a company’s policies.
For the first time, signatories will be expected to take environmental, social and governance factors, including climate change, into account and to ensure their investment decisions are aligned with the needs of their clients.
They will also have to explain how they have exercised stewardship across asset classes beyond listed equity, such as fixed income, private equity and infrastructure, and in investments outside the UK.
In addition, those who sign up to the code are required to explain their organisation’s purpose, investment beliefs, strategy and culture and how these enable them to practice stewardship. They are also expected to show how they are demonstrating this commitment through appropriate governance, resourcing and staff incentives.
Signatories also commit to working together with regulators and industry bodies to identify and respond to the risk of market and systemic failure.
Commenting on the revision to the UK Stewardship Code, Martin Webster, partner at Pinsent Masons said: ‘It is encouraging that the new code highlights the importance of environmental, social and governance factors and their role in encouraging long-term, sustainable investment. These issues are relevant to all companies and their investors, with climate change now seen as a material issue.
‘But, it is questionable whether the new code does enough to remove the risk of boilerplate reporting. And, with at least half the value of the UK Stock Market held by overseas investors, it is unclear how much notice they will take of these new, more onerous, but still voluntary provisions.’
The regulator says this second update to the Code, which was originally released in 2010, is intended to encourage 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.
Simon Dingemans, FRC chair, said: ‘It is an ambitious revision that strengthens the UK’s standards of governance, transparency and clear reporting. We are looking for widespread adoption by the investment community, reinforcing the attractiveness of the UK as a place to do business and delivering real benefits to the economy, the environment and society more broadly.’
Following the outcome of the independent Kingman review, the FRC is engaged in a transition to a new regulatory body, the Auditing, Reporting and Governance Authority (ARGA), which is set to be given stronger statutory power.
The new Code takes effect on 1 January 2020. It comprises a set of ‘apply and explain’ principles for asset managers and asset owners, and a separate set of Principles for service providers. It does not prescribe a single approach to effective stewardship, but is designed to allow organisations to meet the expectations in a manner that is aligned with their own business model and strategy.