UK Stewardship Code 2020

26th February 2020

The Financial Reporting Council (FRC) has published a new UK Stewardship Code 2020 (Code) setting out good stewardship practice for asset managers, asset owners and service providers when engaging with investee companies. The new code replaces the version that has been in existence since 2012 and applies to reporting years beginning on or after 1 January 2020.

The Code 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” and lists the following activities as coming within the meaning of the term:

• Analysis before investment.
• Monitoring assets and service providers.
• Engaging issuers and holding them to account on material issues.
• Working with others to influence issuers, and with others to manage market-level risks.
• Publicly reporting on the outcomes of these activities.

The Code has been restructured so that it follows a similar structure to that of the 2018 UK Corporate Governance Code. It is divided into five main sections covering the core areas of stewardship responsibility: (i) purpose, objectives and governance; (ii) investment approach; (iii) active monitoring; (iv) constructive engagement and clear communication; and (v) exercise rights and responsibilities. The Code follows an ‘apply or explain’ model setting out twelve principles for asset owners and asset managers and six principles for service providers with both sets of principles being supported by reporting expectations.

The main changes from the 2012 Stewardship Code are:

• The inclusion of a definition of stewardship.
• The application of the Code is extended to asset owners and service providers.
• Signatories must report annually on stewardship activity in a single stewardship report. The previous Code required a separate policy and practice statement.
• The report should be fair, balanced and understandable with examples of both successful and unsuccessful outcomes.
• There is a new reporting expectation that asset owners and managers must disclose the proportion of shares voted in the past year and why.
• Signatories are expected to take environmental, social and governance (ESG) factors (including climate change) into account and ensure that their investment decisions are aligned with their investee needs.

WM Comment

While the Code and reporting on its application are voluntary, there is a requirement in the FCA Handbook for asset managers to disclose whether or not they comply with the Code. In addition, the likely replacement of the FRC with the Audit, Reporting and Governance Authority may mean that the regulator will have further powers to enforce the UK Stewardship Code in the future.