Revised FRC UK Stewardship Code focuses on ESG factors

Out-Law News | 24 Oct 2019 | 2:57 pm | 2 min. read

A revised UK Stewardship Code, in which environmental, social and governance (ESG) factors play a more prominent role, will take effect from 1 January 2020, the Financial Reporting Council (FRC) has announced.

The revised Code is now targeted at asset owners, such as pension funds and insurance companies, and service providers, as well as asset managers; and covers a wider range of corporate assets. The revisions were prompted in part by Sir John Kingman who, in his government-commissioned review of the FRC, recommended that the Code be abolished if it could not be made more effective.

The Code incorporates a new definition of stewardship: "the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries, which leads to sustainable benefits for the economy, the environment and society". Signatories are expected to take ESG factors, including climate change, into account and to ensure their investment decisions are aligned with the needs of their clients; and will be required to report annually on their stewardship activity and its outcomes.

Webster Martin

Martin Webster

Partner

While [the FRC has] ramped up what investors are asked to do, there must be some scepticism whether the risk of yet more boilerplate has been avoided.

A new principle, principle 7, states that signatories are expected to consider material ESG issues, including climate change, as part of their investment, monitoring, engagement and voting activities.

FRC chair Simon Dingemans said that the "ambitious" revisions "[mark] a step-change in the expectations for investors, their advisors, and how they manage investments for their savers and pensioners".

Corporate governance expert Martin Webster of Pinsent Masons, the law firm behind Out-Law, said: "Sir John Kingman called the Code 'well-intentioned' but 'not effective in practice'. He saw it as a driver of boilerplate reporting by large investors and, if that could not be changed, recommended that the Code be abolished. This is the FRC's response to that threat and, while they have ramped up what investors are asked to do, there must be some scepticism whether the risk of yet more boilerplate has been avoided".

"The FRC is a UK regulator. At least half the value of the UK stock market is held by overseas investors and it is not clear how much notice they will take of these new, more onerous, but still voluntary provisions," he said.

Tom Proverbs-Garbett of Pinsent Masons said: "The FRC makes clear in the introduction to the new Code that ESG factors, including climate change, have become a material issue for investors and, by implication, that this is of importance when fulfilling stewardship responsibilities".

"In addition to a principle devoted to ESG matters, the environment is explicitly mentioned in the very first principle as one of the areas in which 'good' stewardship should seek to provide long-term benefits. This reflects the increasing visibility and importance of ESG matters both for companies and their investors," he said.

Garbett Tom Sept_2019

Tom Proverbs-Garbett

Senior Associate

ESG factors, including climate change, have become a material issue for investors and, by implication ... this is of importance when fulfilling stewardship responsibilities.

The UK Stewardship Code was first introduced in 2010, and sets out how institutional investors should engage with the companies in which they hold investments. From 2020, it will cover investment in asset classes other than listed equity such as fixed income, private equity and infrastructure, and investment in non-UK assets. It will also apply to a wider range of investors. The changes reflect the changing nature of investment and "will help align the approach of the whole investment community in the interest of end-investors and beneficiaries", the FRC said.

Signatories will be required to explain their organisation's purpose, investment beliefs, strategy and culture, and how these enable them to practice effective stewardship. They will also be expected to show how their governance arrangements, resourcing and staff incentives demonstrate their commitment to stewardship. Signatories must report annually on their stewardship activity including their engagement with the assets they invest in, their voting records and how they have protected and enhanced the value of their investments for the benefit of their clients; and the outcomes these activities have had.