The UK Stewardship Code 2020: a regulatory revolution?

The UK’s new Stewardship Code took effect from 1 January 2020. Firms must submit a final Stewardship Report to the Financial Reporting Council (FRC) by 31 March 2021 if they want to be included in the first list of signatories to the UK Stewardship Code 2020.

Many of the new themes that it covers have become increasingly topical: the Stewardship Code has proved prescient in aligning with the public mood. It is increasingly relevant given increased public focus on climate change, global protests against racial inequality, and amid the context of Covid-19. For asset managers, asset owners, and service providers, becoming a signatory to the new Stewardship Code represents an opportunity to demonstrate engagement with some of the key themes driving change in 2020.
 

Ambitious new requirements

The aspiration of the new code is clear – the definition of stewardship has been boldly redefined as delivering “long-term value for the economy, the environment and wider society”. The number of principles for asset managers and asset owners has increased from seven principles under the previous iteration of the code, to 12 in 2020, and, for the first time, environment, social and corporate governance (ESG) is explicitly included as a principle in scope. Service providers – such as proxy advisors and research firms – are also specified as being covered by the code, with seven of their own distinct principles to report against.

There is a far keener focus in the new code on demonstrating outcomes. It is not enough simply to state a policy on the various principles under the code – signatories will need to demonstrate how they have acted on their policies and made an impact. Similarly, the code operates on an ‘apply and explain’ basis, whereas the previous iteration of the code had worked on a ‘comply or explain’ basis. Given all of this, it could be argued that the UK Stewardship Code 2020 is less of an evolution of the 2012 code and more of a revolution.
 

What are the advantages of becoming a signatory?

It is still voluntary, which raises an important question: given the array of other demands being made on firms in 2020, what are the advantages of becoming a signatory?

The short answer is that, on matters such as ESG, purpose and societal value, the new code closely reflects the public mood and the concerns of stakeholders. Becoming a signatory of the code will arguably provide greater assurance to these same stakeholders that a firm is taking seriously the key issues of 2020 – including responding to Covid-19 (the FRC has noted that it expects signatories to address pandemic risk in their stewardship reporting).
 

It could be argued that the UK Stewardship Code 2020 is less of an evolution of the 2012 code and more of a revolution
 

Arguably, 2020 has been a year in which the shift towards ‘stakeholder capitalism’ has been accelerated by events, with increased focus on matters such as corporate purpose, the environment, and corporate governance. In this sense, becoming a signatory to the new code is a means of demonstrating an awareness of some of the most pressing challenges facing businesses.
 

How, does a firm become a signatory?

The first thing to note is that we are already comfortably into the first reporting period: the code went live on 1 January 2020. The FRC has observed that it will engage with and provide feedback on draft stewardship reporting from would-be signatories up until 30 November 2020, ahead of the deadline for submission of stewardship reporting on 31 March 2021. Asset owners have a slightly later deadline of 30 April 2021. The FRC will then publish the list of signatories in the second half of 2021, before conducting analysis of reporting.

There are a number of governance requirements to bear in mind when seeking to become a signatory. Firms are required to produce a single, succinct and engaging report, which must be approved by its governing body, and signed by the chair, CEO or CIO. The report should be fair, balanced and understandable, and should cover all assets across all jurisdictions. Notably, the code also calls for reports to be subjected to internal or external assurance. Becoming a signatory is therefore a significant commitment.
 

Supporting effective stewardship

The FRC has clearly raised the bar in 2020 with the introduction of the new stewardship code, and would-be signatories will have to work hard to meet its requirements and show how they are achieving outcomes across each of its principles. However, while the expectations are much higher, this is a fair reflection of the heightened expectations of stakeholders more broadly.

The FCA has indicated it will continue to work with the FRC as the UK Stewardship Code 2020 is introduced. An important area of the FCA’s focus is the balance between the regulatory baseline for effective stewardship and promoting higher standards through the UK Stewardship Code 2020. It will consider the need for further action as the code takes effect, so that the regulatory framework continues to support effective stewardship.

The UK Stewardship Code 2020 is a timely benchmark against which firms can show how they are meeting the challenges of our time.