FRC: new “rigorous requirements” for Stewardship Code

FRC: new “rigorous requirements” for Stewardship Code

The Financial Reporting Council aims for the Stewardship Code to better complement “stronger corporate governance provisions”

The Financial Reporting Council (FRC) has today announced that they are looking to strengthen the Stewardship Code.

The body has reported that their aim is to set “substantially higher expectations for investor stewardship policy and practice.”

Having engaged with 170 members in the investment community, the FRC has revealed that the new Code focus will be on the effectiveness of the stewardship, as well as how it delivers sustainable value for the beneficiaries, economy, and society.

According to the FRC’s report: “Stewardship is the responsible allocation and management of capital across the institutional investment community to create sustainable value for beneficiaries, the economy, and society. Stewardship activities include monitoring assets and service providers, engaging issuers and holding them to account on material issues, and publicly reporting on the administrative provisions that transpose SRD II.”

Who needs to be aware of these changes?

These changes will be relevant to asset managers, asset owners, and “entities providing services to the institutional investment community,” FRC has revealed. The investment community includes: investment consultants, service providers, and proxy advisers.

Three key areas

The areas that the FRC has focused on when making changes to the Stewardship Code are as follows:

  • Purpose, values, and culture: “Signatories are asked to develop their organisational purpose and disclose their stewardship objectives and governance,” FRC has written in the proposal report. The body has emphasised the importance of a well-defined purpose; signatories should be able to have an articulate role in the “institutional investment community”.
  • Recognising the importance of ESG factors: The new Stewardship Code makes explicit references to ESG factors throughout the proposal. The report stated: “Signatories are expected to take into account material ESG factors, including climate change, when fulfilling their stewardship responsibilities.”
  • Stewardship beyond listed equity: Changes have allowed for the Code to be more closely and cohesively tied to the UK Corporate Governance Code. This is something investors need to bear in mind when engaging constructively with investee companies about departures from “recommended practice in the UK Corporate Governance Code.”

Further to the point that the structure of the Code is now similar to the UK Corporate Governance Code, the report stated: “The Code reflects the changing nature of UK investments and builds on significant developments in sustainable finance, responsible investment and stewardship since 2012. It makes explicit reference to environmental, social, and governance (ESG) factors, and requires signatories to integrate stewardship into their investment approach. The Code also now states that signatories should report on their own purpose, values, and culture, and use the resources, rights, and influence available to them to exercise stewardship beyond UK-listed equity.”

In their statement, the FRC has cited the developed “rigorous requirements” in place when it comes to reporting.

There will be an increased focus in how stewardship activities measure up against FRC’s set objectives; the FRC has warned that they will be watching over developments to ensure that there is indeed an improvement in quality.

Sir Win Bischoff

“The new Stewardship Code will play a key role in complementing the stronger corporate governance provisions that took effect at the start of this year,” added Sir Win Bischoff, chair of the FRC.

He continued: “The FRC conducted extensive outreach in early 2018 to inform this review of the Stewardship Code. It recognises the significant changes in the investment industry and stewardship landscape since the 2012 revision. It sets both higher expectations for stewardship practice and introduces more rigorous public reporting, with a focus on outcomes and effectiveness. We believe the changes proposed put it at the forefront of stewardship internationally.”

Summary

For those wishing to respond to the comments the FRC has set out in the consultation document, they have until Friday 29 March 2019 to do so.

Today’s statement also revealed that the FRC and the Financial Conduct Authority (FCA) will also be publishing Building a regulatory framework for effective stewardship—the purpose of which will be to further advance the discussion surrounding effective stewardship, the expectations for financial services firms, and how the UK’s regulatory framework can offer support.

The report itself, as aforementioned, clearly sets out the new guidelines and changes that will be in place to fulfil the “substantially higher expectations for stewardship.”

In the introduction of the report, it was emphasised that it “aims to stimulate greater demand for an engaged approach to stewardship and investment decision-making, which is aligned to the investment time-horizons of beneficiaries [that] are often long-term.”

Follow the links to read the full FRC report and the summary here.

 

Follow us on Twitter to get involved in the discussion: @AccountancyAge

Whitepaper

The Future of Finance is in the CFO's Hands

Business The Future of Finance is in the CFO's Hands

4m
Save a Week a Month Consolidating Accounts

Accounting Software Save a Week a Month Consolidating Accounts

5m
Mitigating Risk Through Internal Control

Legal Mitigating Risk Through Internal Control

6m
Could tax season have run more efficiently?

Corporate Tax Could tax season have run more efficiently?

6m

Related Articles

Changing the corporate governance framework

Corporate Governance Changing the corporate governance framework

9m Nick Graves
Solvency and liquidity queries tackled in FRC going concern guidance

Accounting Standards Solvency and liquidity queries tackled in FRC going concern guidance

3y Calum Fuller, Reporter
Audit firm governance code to champion quality and transparency

Accounting Firms Audit firm governance code to champion quality and transparency

4y Chris Warmoll, Writer
EU's plan gives opportunity to restore audit confidence

Accounting Standards EU's plan gives opportunity to restore audit confidence

4y Chris Warmoll, Writer
FRC consults in readiness for EU audit rules

Accounting Standards FRC consults in readiness for EU audit rules

4y Chris Warmoll, Writer
FRC concerned over BDO's audit scepticism levels

Accounting Firms FRC concerned over BDO's audit scepticism levels

4y Kevin Reed, Writer
Watchdog issues review of audit governance code

Audit Watchdog issues review of audit governance code

4y Chris Warmoll, Writer
Deloitte succeeds in bid to overturn several charges in MG Rover appeal

Corporate Governance Deloitte succeeds in bid to overturn several charges in MG Rover appeal

5y Kevin Reed, Writer