Newsflash: Achieving effective stewardship in the UK
Three papers have been issued during the past week regarding how to achieve effective stewardship in the UK:
- The FRC has published a consultation on the Stewardship Code.
- The FCA and the FRC have published a joint discussion paper, “Building a regulatory framework for effective stewardship”, aiming to reset the bar on effective stewardship in the UK.
- In addition, the FCA has published a consultation paper on regulatory measures to implement the shareholder engagement provisions of the Shareholder Rights Directive II in the UK.
The FRC’s revised Stewardship Code
The FRC has launched a consultation on proposed changes to the Stewardship Code. This Code applies to asset owners, asset managers and other entities providing services to the institutional investment community (such as proxy advisers) that want to demonstrate their commitment to stewardship. The consultation includes 16 questions for respondents to answer and runs until 29 March 2019.
The draft Stewardship Code echoes many features of the 2018 UK Corporate Governance Code, including its structure and its focus on long-term sustainable success. Various provisions of the draft Stewardship Code differentiate between roles that entities play in the investment community, to ensure it can be used effectively by all.
Key changes to the Stewardship Code
The FRC aims through the revisions to the Code to “encourage effective stewardship that operates in the interest of savers, companies, the economy, environment and society, reflects growing trends in investment, and complements recent and imminent regulatory changes.” Key changes to meet this objective include:
- Purpose, values, and culture: signatories will be asked to define these and to be able to articulate how the alignment of these areas enables them to fulfil their stewardship obligations for the benefit of their clients and beneficiaries.
- Integration of stewardship and investment approach: higher standards on how stewardship objectives are integrated into the investment approach, including investment decision making and mandate design.
- Stewardship beyond listed equity: recognising the importance of stewardship of assets of all classes, without an exclusive focus on listed entities or particular jurisdictions.
- The importance of environmental, social and governance (ESG) issues: the revised Code engages with ESG issues, highlighting climate change, and expects signatories to take these into account in their stewardship activities. The consultation itself highlights numerous developments in ESG issues, including in international stewardship codes.
- More rigorous reporting requirements: signatories will be required to report publicly against their stewardship activities in two parts: a Policy and Practice Statement which is not expected to change annually and an annual Activities and Outcomes Report, which will include an assessment of how effectively the entity has achieved its stated objectives.
Building a regulatory framework for effective stewardship
In addition and at the same time, the FRC and FCA have launched a joint discussion paper, “Building a regulatory framework for effective stewardship”.
The discussion paper seeks input on how to encourage the investment community to engage more effectively in stewardship of companies within the existing capital markets structure, and to examine what effective stewardship entails and what higher standards the UK should aspire to. It aims to assist institutional investors as they prepare to comply with the Shareholder Rights Directive II and, should they choose, the revised Stewardship Code.
The FRC and FCA ask ten broad questions designed to get input from stakeholders on:
- what constitutes effective stewardship;
- the challenges in delivering an effective regulatory framework for stewardship in the UK; and
- how to strike the right balance between regulatory rules and voluntary codes of best practice.
Some of the questions overlap with the questions on the Stewardship Code, covering matters such as whether there are particular areas where investors should focus stewardship efforts, for example ESG outcomes.
Feedback on this discussion paper is requested by 30 April 2019.
FCA consultation on the implementation of SRD II
The FCA has also issued a consultation paper on proposed changes to the FCA Handbook to implement the provisions of the Shareholder Rights Directive II in the UK. This consultation assumes that a transition period will be agreed between the UK and the EU and that SRD II will therefore need to be implemented. Responses to that consultation paper are requested by 27 March 2019.