On Monday 6 September, the Financial Reporting Council (FRC) published a list of successful signatories to the UK Stewardship Code (Stewardship Code). The FRC received 189 applications from 147 asset managers, 28 asset owners, including pension funds and insurers, and 14 service providers, including data and information providers and investment consultants. Two-thirds of these made the list. The FRC has only published the names of the successful applicants which will no doubt be a relief to those who were not successful. It's great to see a number of our clients listed.

What best practice did the FRC highlight? The FRC noted that it was pleased to see investors:

  • better integrating stewardship and environmental, social and governance (ESG) factors into their investment decision-making
  • reporting on asset classes other than listed equity and 
  • identifying the outcomes of their efforts

The FRC also noted that there was some strong reporting on underpinning governance activities. 

Why did the FRC reject some of the applications? The FRC's reasons for rejecting applications include:

  • a failure to address all the Principles of the Stewardship Code
  • failing to provide supporting evidence for their approach and
  • inadequate reporting on approaches to review and assurance and monitoring service providers 

The FRC has provided individual feedback to unsuccessful applicants who are eligible to reapply almost immediately. The next deadline is 31 October 2021 although this may be of limited benefit to an organisation which has received significant feedback from the FRC.

How does an organisation become a signatory to the Stewardship Code? To become a signatory to the Code, an organisation must submit a Stewardship Report to the FRC demonstrating how it has applied the Code’s Principles (see below) in the previous 12 months. The FRC then assesses the report and if it meets their reporting expectations, the organisation will be listed as a signatory to the Stewardship Code. Organisations which are listed as signatories to the code must report annually if they are to remain signatories. 

What is the objective of the Stewardship Code? The code sets high stewardship standards for asset owners and asset managers and for service providers that support them. It is intended to serve as a global reference point for investment stewardship. The FRC defines stewardship as "the 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."

The Stewardship Code is likely to become increasingly important given the continued focus on sustainable investment. We expect that will be reflected in the number of applications made to the FRC in October 2021. 

What are the principles for asset owners and asset managers? There are 12 principles. These are:

  • Principle 1 Signatories’ purpose, investment beliefs, strategy, and culture enable stewardship that creates long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society
  • Principle 2 Signatories’ governance, resources and incentives support stewardship
  • Principle 3 Signatories manage conflicts of interest to put the best interests of clients and beneficiaries first
  • Principle 4 Signatories identify and respond to market-wide and systemic risks to promote a well-functioning financial system
  • Principle 5 Signatories review their policies, assure their processes and assess the effectiveness of their activities
  • Principle 6 Signatories take account of client and beneficiary needs and communicate the activities and outcomes of their stewardship and investment to them
  • Principle 7 Signatories systematically integrate stewardship and investment, including material environmental, social and governance issues, and climate change, to fulfil their responsibilities
  • Principle 8 Signatories monitor and hold to account managers and/or service providers
  • Principle 9 Signatories engage with issuers to maintain or enhance the value of assets
  • Principle 10 Signatories, where necessary, participate in collaborative engagement to influence issuers
  • Principle 11 Signatories, where necessary, escalate stewardship activities to influence issuers
  • Principle 12 Signatories actively exercise their rights and responsibilities

Service providers report against six separate principles.

All of the principles are supported by reporting expectations which indicate the information which should be included in a stewardship report. The Stewardship Code encourages signatories to consider the following issues (but not on an exclusive basis) when applying the Principles:

  • the effective application of the UK Corporate Governance Code and other governance codes
  • directors’ duties, particularly those matters to which directors should have regard under section 172 of the Companies Act 2006 
  • capital structure, risk, strategy and performance
  • diversity, remuneration and workforce interests
  • audit quality (which is a topic of particular concern at the moment)
  • environmental and social issues, including climate change and
  • compliance with covenants and contracts.