Stewardship and Governance “Two Sides of the Same Coin” – FRC

UK regulator aims to address gaps in collaborative engagement in upcoming review of the Stewardship Code. 

A key aim of the Financial Reporting Council’s (FRC) planned review the UK Stewardship Code is closer alignment with the Corporate Governance Code to build trust between asset owners and investee firms, asset owners heard yesterday.  

“Corporate governance and stewardship are two sides of the same coin, and they need to work together,” David Styles, Director, Corporate Governance and Stewardship at the FRC, told onlookers at ESG Investor’s Stewardship Summit on 10 May. 

“It’s evident that E, S and G are much more integrated than ever before, so I hope that when the consultation on the UK Corporate Governance Code is launched in the coming weeks that those linkages will be evident in terms of quality reporting from companies to inform investors so they can conduct stewardship activities more effectively.” 

The consultation on the Corporate Governance Code is expected to open before the end of the month, while the Stewardship Code review will take place in Q3 2023.  

The UK Stewardship Code currently has over 250 signatories, representing approximately US$45 trillion in AuM, including Brunel Pension Partnership, Church of England Pensions Board and Railpen, among others.

Following the 2020 update of the UK Stewardship Code, the FRC carried out research in collaboration with King’s College and Durham University which found that governance structures on stewardship had improved, but that gaps remained in terms of collaboration between asset owners and managers, according to Styles. 

As part of the review, the FRC will consider ways to continually improve reporting on evidence of stewardship activities and outcomes by signatories, he said, noting that there is a tension between flexibility and quality.  

“We recognise with the Stewardship Code that one size doesn’t fit all,” he said, noting that it comprises a set of 12 ‘apply and explain’ principles for asset managers and asset owners, with a separate set of six principles for service providers. 

The principles are supported by reporting expectations which indicate the information that organisations should report to become a signatory, with the code outlining for main sections: purpose and governance, investment approach, engagement, and exercising rights and responsibilities.  

“We wanted to make sure that [the code] was accessible, but we’ve also tried to maintain the quality of application and stewardship,” he said. “It’s not simply about organisations creating a stewardship policy. It’s about outlining how it is that policy is enacted and to feed into long-term sustainable returns.” 

Developing a market for stewardship 

Alongside the development of the Stewardship Code, the Financial Conduct Authority (FCA) is also seeking feedback from asset owners and other stakeholders on whether regulatory reforms are required to address the systemic risks through ‘macro’ or system stewardship activities. 

DP23/1 noted that system stewardship by investors is a complex activity, in part due to the increased likelihood of conflicts of interest. As such, the paper asked for input on “additional measures” to help FCA-regulated firms identify and respond to market-wide and systemic risks. 

According to Mark Manning, Strategic Policy Advisor, Sustainable Finance at the FCA, feedback on this subject would inform a planned review of the overall UK legal and regulatory framework relating to investment stewardship, due to be conducted later this year. The review will be led by the FRC, with the involvement of the FCA, the Department of Work and Pensions and The Pensions Regulator. 

During a keynote speech at ESG Investor’s Stewardship Summit, Manning said the regulators’ review of stewardship regulation would aim to address the topics including a common language for stewardship, streamlining reporting, systemic stewardship and stewardship across asset classes.  

When asked about the role of regulatory guidance in developing a market for stewardship, Styles said that while improvements have been made, regulators must be mindful potential risks and ensure consistency. 

“The Stewardship Code is an important part of the regulatory structure, but we need to think about how all the regulators can work together to ensure coherence,” he said. “We must avoid well-intentioned but meaningless disclosure and focus on what’s important. 

“We should also consider the importance of stewardship within institutions and the oversight it receives from senior management,” he added. “By addressing these issues, we can improve the market and overcome the challenges we face.”

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