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Stewardship Code summary of proposals
Based on information gathered from the FRC's assessment of current reporting, engagement with over 1,500 stakeholders, as well as changes in the institutional investment landscape and regulatory developments. We are proposing the following changes:
A revised definition
Stewardship supports a range of investment styles and objectives; from those seeking to integrate relevant material factors, those aiming to address drivers of sustainability-related financial risks, and those with mandates that seek to have positive real-world impact alongside financial goals.
The Stewardship Code does not direct investors' objectives, it is for signatories to explain how they exercise stewardship to deliver long-term sustainable value for clients and beneficiaries.
The definition of stewardship has evolved over time to reflect changing market practice. We propose the following revised definition:
'Stewardship is the responsible allocation, management and oversight of capital to create long-term sustainable value for clients and beneficiaries.'
Effective stewardship drives investors to take account of long-term risks and opportunities. This helps them to make well-informed investment decisions to deliver returns that meet the objectives of their clients and beneficiaries today, without compromising the ability to do so in the future. Stewardship that supports sustainable, long-term returns may lead to wider benefits for the economy, the environment and society.
The stewardship activities investors undertake will depend on their role in the investment chain, as well as their investment approach and types of assets. The purpose of the Stewardship Code is to provide transparency around the different approaches and activities that investors and their service providers undertake to steward assets in their care.
This definition is intended to support better and more transparent conversations between those in the investment chain about their investment beliefs and objectives, and how their stewardship supports these.
New reporting structure and frequency
Much of the information currently reported to us related to "Context” disclosures is often repeated from one year to the next as it does not change. To reduce unnecessary burden, we propose that reporting is in two parts:
- Policy and Context Disclosure: on information from applicants about their organisation, its governance and resourcing, linking to relevant policies. We propose that this disclosure is reviewed less frequently by the FRC (after three years) and updated only as necessary by the signatory. Signatories will still need to submit this annually, even with minimal or no changes, to ensure the FRC has the most up-to-date version on its website.
- Activities and Outcomes Report: to be a signatory to the updated Code and every 12 months thereafter, signatories will be required to submit a report that provides information on how they have sought to apply the Principles through the activities they have undertaken in the preceding year.
| Year | Policy and Context Disclosure | Activities and Outcomes Report | |
|---|---|---|---|
| Year 1 | Policy and Context Disclosure | + | Activities and Outcomes Report |
Formal approval on both Disclosure and Report from the applicants' appropriate governing body. Formal assessment on both Disclosure and Report by the FRC.
| Year | Policy and Context Disclosure | Activities and Outcomes Report | |
|---|---|---|---|
| Year 2 | Policy and Context Disclosure | + | Activities and Outcomes Report |
| Year 3 | Policy and Context Disclosure | + | Activities and Outcomes Report |
Applicants should submit their Policy and Context Disclosure, and can do so without any changes, or with only minimal changes from the previous year. Where there are minimal or no changes, there is no further formal assessment of applicants' Policy and Context Disclosure. There is formal assessment on the Activities and Outcomes Report only.
Applicants may choose to make more substantial changes to the Policy and Context Disclosures if needed. In this case, applicants should provide updated disclosure, inform the FRC that there are substantial changes and explain how these changes impact their stewardship activities in their Report. The FRC may choose to undertake a formal re-assessment of Policy and Context Disclosures in addition to the Activities and Outcomes Report.
| Year | Policy and Context Disclosure | Activities and Outcomes Report | |
|---|---|---|---|
| Year 4 | Policy and Context Disclosure | + | Activities and Outcomes Report |
Formal approval on both Disclosure and Report from the applicants' appropriate governing body. Formal assessment on both Disclosure and Report by the FRC.
Streamlined Principles and introduction of guidance
We have streamlined the Principles for Asset Owners and Managers:
| Policy and Context Disclosure | Principles (Activities and Outcomes Report) |
|---|---|
| A. The organisation, its clients and investment beliefs | 1. Integration of stewardship and investment |
| B. Governance and resources | 2. Market-wide and systemic risks |
| C. Stewardship policies and review | 3. Engagement |
| D. Conflicts of interest | 4. Exercising rights and responsibilities |
| E. Dialogue with clients and beneficiaries | 5. Selection and oversight of external managers |
| 6. Monitoring service providers |
We propose to no longer have “reporting expectations" for Principles, but instead have concise prompts on 'how to report'. These are designed to encourage signatories to explain their individual approach to stewardship and will be supported by guidance.
| Section | Description |
|---|---|
| Principle | The Principles indicate practices that, we believe, reflect effective stewardship. Each Principle has a brief supporting commentary to explain why this is an important part of effective stewardship. |
| How to report | These points are brief, high-level prompts for signatories to explain how they have applied the Principle. |
| Guidance | Guidance is structured around the reporting prompts. It provides more narrative and examples for signatories to draw on to help them tell their story about how they exercise stewardship in a way that is tailored to their organisation and approach. |
Dedicated Principles for different entities
Asset owners and asset managers
Asset owners and asset managers have different rights, responsibilities and influence within the investment chain, and in exercising stewardship. Reporting against the Code could better demonstrate how they deliver this in practice. Some Principles are focussed on the role of undertaking stewardship directly with an issuer or asset, with a separate Principle on the oversight role for those managing assets through an external manager. We propose Principles should be applied where relevant to a signatory's stewardship activity, as follows:
| Principles | Who should apply them |
|---|---|
| 1. Integration of stewardship and investment | Applied by all asset owner and asset manager signatories |
| 2. Market-wide and systemic risks | |
| 6. Monitoring service providers | Signatories report on the Principles that are relevant to their stewardship activities. Where a Principle refers to stewardship activity that represents 10% or less of a signatory's assets under management, then it is not an expectation that they respond to that Principle |
| 3. Engagement | |
| 4. Exercising rights and responsibilities | |
| 5. Selection and oversight of external managers |
Proxy advisors and investment consultants
Principles of the updated Service Providers Code focus on the activities of proxy advisors and investment consultants. While Principle 1 on communication with clients should be applied by all Service Provider signatories, we propose that:
- Principle 2 on quality and accuracy of recommendations of the Service Providers' Code applies only to proxy advisors.
- Principle 3 on integration of stewardship and advice and Principle 4 on market-wide and systemic risks of the Service Providers' Code applies only to investment consultants.
| Policy and Context Disclosure | Principles (Activities and Outcomes Report) |
|---|---|
| A. The organisation and its services | 1. Communication with clients |
| B. Governance and resources | 2. Proxy advisors – quality and accuracy of recommendations |
| C. Stewardship policies and review | 3. Investment consultants – integration of stewardship and advice |
| D. Conflicts of interest | 4. Investment consultants – market-wide and systemic risks |
Use of cross-referencing to external disclosures
The FRC recognises that some signatories may follow other reporting frameworks or requirements that align with content of the Code. To avoid duplication and unnecessary burden, we are exploring the extent to which the Code can allow signatories to refer to information disclosed outside of their stewardship report as part of their assessment.
However, enabling the use of cross-referencing in this way would mean that stewardship reports are no longer a comprehensive ‘one-stop-shop' that provide an overarching view of a signatory's stewardship. Disclosures provided may be viable at the time of the FRC's assessment process, but risk being inaccessible at a later date, despite signatory status being determined due to the quality of the disclosure provided. We welcome views on allowing cross-referencing to external sources in Stewardship Reports.
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