FRC proposes revisions to UK Stewardship Code

What does this mean?

Whilst the current Stewardship Code was only finalised in 2020, the FRC committed to reviewing it again to reflect industry feedback - namely that reporting was becoming too burdensome and too focused on compliance rather than the impact made through stewardship of assets owned by asset managers and owners. 

Proposals set out in this consultation were shaped by significant stakeholder and regulatory engagement, four years of assessing current stewardship reporting, regulatory and policy developments (e.g. The Pension Regulator’s 2024 General Code of Practice, the Department for Work and Pensions’ 2022 guidance for reporting on stewardship, the UK’s 2024 Transition Finance Market Review) and changes in the institutional investment landscape. Proposed amendments are grouped under four key themes, set out below.

Purpose

The definition of stewardship has evolved over time and the FRC proposes to amend this further.  The FRC noted that some stakeholders interpreted the 2020 definition to signify that pursuing environmental and social objectives was the primary purpose of stewardship. The proposed revised definition focuses on ‘long-term sustainable value creation’ for clients and beneficiaries, focusing on investment returns which may lead to wider benefits for the economy, the environment and society. However, this proposed definition may lead to some confusion over the interpretation of “sustainable”, and whether this is intended to focus more on investment return, or wider societal benefits. 

Principles

To improve the usefulness of the reporting made by firms, the FRC proposes a significant restructuring and streamlining of the Principles. The intention is that this will reduce reporting on more ‘static’ information, linked (for example) to internal policies and governance, which are not likely to change year-on-year. 

For asset managers, the FRC’s proposals also clarify what they should be reporting on, specifically that they should use a 10% AUM threshold when determining how to report under the updated Principles. For example, this would mean that an asset manager should report on its oversight of third party managers if more than 10% of AUM is delegated to third parties. The FRC also clarifies how to report under different asset classes; historically, firms have struggled to report engagement and outcomes for non-equities, where it is harder to measure outcomes without voting rights.`

The amended structure would remove the “Context”, “Activity” and “Outcomes” subheadings and would also include more concise prompts on ‘how to report’ and introduce guidance to support signatories in making good quality reports across different asset classes.

Process

Proposals seek to keep relevant “policy and context” information publicly available (e.g. information about the organisation, governance and resourcing, relevant policies) while also having shorter, more usual reporting.  This would involve splitting the types of information disclosed into two parts: “Policy and Context Disclosure” and “Activities and Outcomes Report”.  

There would be less frequent reporting requirements for the former (reviewed by the FRC after 3 years), unless there were significant changes.  This reflects the fact that information in the “Policy and Context” disclosure is not likely to change significantly every year. The latter would still need to be submitted every 12 months to the FRC.  

Positioning

Given that signatories may follow other reporting frameworks or have other reporting requirements that align with the Stewardship Code, the FRC is proposing to allow signatories to cross-reference other, publicly accessible disclosures within their stewardship report.  

This would seek to reduce duplication and unnecessary burden in reporting. But it would mean that stewardship reports would no longer be a standalone, overarching view of a firm’s stewardship activities.

What do firms need to do?

The FRC’s consultation proposes notable updates to the UK Stewardship Code and how signatories will need to report going forwards. This will be particularly impactful on firms that implement their stewardship approach on a global basis, since the Code only applies to UK firms. We know from experience that some firms have been denied signatory status under the Stewardship Code, creating negative publicity around those firms. Therefore, it's important for firms to engage in this process and clarify any uncertainties now, potentially avoiding future challenges. 

This is a fundamental change proposed to the Code- several existing Principles are being merged or updated, and the FRC is updating its definition of stewardship and what firms will need to report. Firms should consider all these changes and how they will impact not only their stewardship reporting, but how they undertake stewardship activities. For example, we know many firms in the sector are investing in new tools and technology to support their stewardship and engagement activities - it’s likely that these changes will accelerate those approaches as firms need to identify not only the engagement activities they undertake across different asset classes, but also continue to identify outcomes and impacts of their activities. 

Asset managers should also consider the interaction between the proposed Stewardship Code revisions and the FCA’’s rules on Sustainability Disclosure Requirements (SDR) and investment labels. A key cross-cutting criteria which a fund must meet in order to apply a sustainable investment label is to identify and disclose the stewardship strategy needed to support the delivery of the sustainability objective. As a result of any revisions to the Stewardship Code, firms might need to adjust the way in which they align their stewardship approach to that objective.

Existing signatories would need to report against the 2020 Code in 2025 while preparing to report under the new structure in 2026. Firms should consider how to manage this transition.

Next steps

The consultation closes 19 February 2025. The updated code is expected to be published in 1H 2025 and effective from 1 January 2026. First reports to the updated Code would be submitted to the FRC in 2026.