UKSIF response: Financial Reporting Council (FRC) UK Stewardship Code Consultation

Alongside our membership, we have long recognised the value that the UK Code brings in helping support long-term value creation in the UK economy that is in the best interests of clients and savers, as well as helping establish a leading standard globally for good stewardship. The Code has successfully led to improved and more transparent stewardship activities across the investment industry to the benefit of investors, clients, and the economy on the whole, including by further embedding effective stewardship practices in our members’ decision-making, investment strategies, and culture.

In our response to the consultation, we outline our perspectives for how the FRC could further cement the UK Code’s success to date in driving forward positive leadership on stewardship- both at home and internationally- and as a consequence positive outcomes for investors and wider groups. A short summary of some of the main points in our response are the following:

• We are supportive of an alternative definition of ‘stewardship’ in the UK Code in contrast to the FRC’s current consultation proposals. Our proposal on the definition- which is supported by the Pensions and Lifetime Savings Association (PLSA) and a number of UKSIF’s members- is the following: “Stewardship is the responsible allocation, management and oversight of capital, having regard to dependencies and impacts on the economy, the environment and society, to create long-term sustainable value for clients and beneficiaries”. We also outline an additional proposed option for an alternative definition in our response, though this is very much secondary to our core proposal. Broadly speaking, we worry that the current proposed definition could help undermine many of the other positive measures highlighted in the Code consultation.
• Linked to this, we would like to see the supporting language to the ‘stewardship’ definition give consideration to referencing the Financial Markets Law Committee (FMLC) opinion published last year, which could help clarify in the revised Code that stewardship is consistent and aligned to the fiduciary duties of investors. We offer further suggestions separately for how the supporting language to the definition could be made more explicit in terms of its direct references to sustainability risks and opportunities.
• In order to help address widespread investment industry concerns relating to the reporting burden presented by the existing Code, among other measures outlined in our response we recommend that the submission and assessment of the ‘Policy and Context’ (‘Part A’) disclosures take place on a triennial basis in place of the proposed frequency outlined in the consultation. Broadly speaking, we support the proposed two-part structure to reporting against the Code which we hope could assist with greater clarity in reporting and streamlining for signatories. This is particularly needed given the increasing average length of Code reports we have seen over recent years.
• We largely endorse the revised set of Code principles set out by the FRC in the consultation. We would welcome more of a direct emphasis on the role of policy advocacy in the proposed Principles 2 and 3, including recognition of its value alongside other mechanisms and elements that can form part of an investor’s overall stewardship toolkit (e.g. corporate engagement and industry-wide engagement). References to the importance of policy advocacy in the updated Code should recognise that this does not have to necessarily form part of every investor’s stewardship approach- or be appropriate in all instances- though at least is more clearly recognised in the Code. This would help reflect a growing focus within the investment community on stewardship’s focus and role beyond company-level engagement alone in delivering long-term value.
• To assist smaller firms in the UK’s industry and promote a more ‘level playing field’, we would welcome consideration from the FRC of a new engagement tool- or similar- offered to smaller prospective signatories to the Code that would seek to assist this specific group in meeting the Code’s high bar going forward. Across the board for all firms, regardless of size, the regulator will need to ensure that high-quality feedback on individual reports is maintained especially as the transition to the new Code takes place over time.

 

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