Andrea Tweedie, Head of Stewardship at the Financial Reporting Council, highlights progress to date and calls for “good, bad and ugly” feedback ahead of the upcoming review.
The Financial Reporting Council’s (FRC) UK Stewardship Code has come a long way since launch in 2010, but must continue to adapt to a rapidly changing regulatory and investment environment to meet the needs of signatories.
Speaking during ESG Investor’s 2024 Stewardship Summit, Andrea Tweedie, Head of Stewardship at the FRC, reflected on the progress achieved on stewardship in the 14 years since the introduction of a code in the UK – highlighting both completed milestones and challenges ahead.
“It is easy to overlook how far stewardship has come,” she said. “Before the first code was introduced in the UK in 2010, it was not uncommon for some investors not to vote at AGMs, and engagement between investors and companies was a lot less common. The UK code is not the only driver of these changes, but we do think it has been a contributing factor.”
The code’s success can be measured in part by its signatories, according to Tweedie. It currently counts 273 signatories, representing over £43 trillion in assets under management – including 188 asset managers, 66 asset owners and 19 service providers – and spanning a wide range of organisations, from single-strategy boutique asset managers to large global asset managers with active and passive funds.
Tweedie also noted the global nature of the code and its subscribers. “The significant international interest in the code is represented by the roughly 40% of signatories who are headquartered outside of the UK,” she said. “Signatories also cover a wide range of asset classes. About a third of the total assets under management is in listed equity, while the other two thirds are in other asset classes – including fixed income, private equity, real estate and infrastructure.”
The code was first introduced following a post-financial crisis review into corporate governance in UK banks and other financial industry entities, which aimed to address concerns around investor behaviour and risk management. The report recommended that the remit of the FRC be extended to develop and encourage best practice stewardship of UK listed companies and their institutional investors – eventually leading to the creation of the Stewardship Code, which was subsequently updated in 2012 and in 2020.
“The new codes substantially raised expectations for how money is invested on behalf of UK savers and pensioners,” said Tweedie. “In particular, they sought to establish a clear benchmark for 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.”
Moving pieces
Regardless of the progress made to date, investors are subject to a rapidly changing regulatory environment and growing demands from beneficiaries, which should be reflected in the Stewardship Code .
As such, the FRC is conducting a further review of the Stewardship Code this year, aiming to better address the evolving needs of its signatories.
“As we seek to understand the demands of the market for stewardship and the experiences of signatories and investee companies, we have decided that the time is ripe for a fundamental review,” said Tweedie. “Many stakeholders tell us that the code has been a useful tool for them in shaping and communicating their stewardship practices. That symmetry status is an important marker for them, and it is often a requirement from our clients.”
While the market for stewardship is “alive and well” and the UK code remains a “leading benchmark” for stewardship globally, the general increase in expectations of activities and outcomes has raised some challenges, she explained. Signatories have come under increased reporting burdens – not just for their annual Stewardship Code report, but from a wide range of client-specific reporting needs, as well as vote disclosure, regulatory, and corporate disclosure requirements.
“We hear from investee companies that the increase in reporting demands from investors is challenging for them, alongside the complex and changing reporting landscape they are subject to,” Tweedie added. “We also hear some concern about short-term expectations versus long-term constructive engagement and improvement. We need to keep the focus on long-term sustainable outcomes and returns for clients and beneficiaries.”
Long-term process
The FRC’s Stewardship Code review will unfold in three different stages. A first listening phase will focus on the four main groups – asset owners, asset managers, service providers and corporates – affected by the code’s principles and their application. The second phase will consist in a full public consultation, to be launched in the summer after the 2024 AGM voting season.
The revised version of the code should then be published in early 2025, with a likely effective date in January 2026.
“We must remember what this is all really about – and that’s driving those long-term sustainable investment returns,” said Tweedie. “The idea is to find a balance between the need for regular, clear and transparent reporting, with an understanding that effecting change and delivering outcomes can take time.”
Other key issues underpinning the review include knowing how signatories can focus on what is most material and effective, and how to bring more clarity on what stewardship teams and investment approaches are seeking to achieve.
“Of course, none of this happens in a vacuum: we are acutely aware that the Stewardship Code exists within a complex regulatory and legal environment that seeks to meet a number of objectives,” said Tweedie. “Signatories need to balance all of this, as well as increasingly complex client expectations.”
With most signatories having operations and investments across the Americas, Europe, Asia-Pacific and the UK, understanding the global picture is also essential, as market expectations and legal frameworks vary between regions.
“We want to reflect on this challenging and changing landscape, consider the code from the bottom up and hear it all: the good, the bad, and the ugly,” Tweedie insisted. “We want to make a Stewardship Code fit for the future and maintain its world-renowned signatory status. We also want to ensure that it is practical, usable, and focused on the right material stewardship activities and priorities.”
Through the consultation, the FRC will seek to understand the extent to which the code supports long-term value creation through engagement that drives companies’ process and performance. As such, it will look to find out which aspects are helping to enhance stewardship the most, and which areas may be creating undue reporting burdens and unintended consequences.
In addition, the FRC will engage with other regulatory bodies involved in the stewardship landscape and with an interest in the operation of the code.
“Each and every one of you in the room today is a stakeholder of the code – whether as a signatory, a practitioner, an asset owner or manager, a service provider, a consultant, or another member of the stewardship ecosystem,” said Tweedie. “Whatever your perspective, whether you have lots of ideas or one key thing that can be improved, or if you are the code’s biggest fan, we want to hear from you.”
