IA response to the FRC UK Stewardship Code Consultation

Commenting on the FRC’s consultation on the UK Stewardship Code, Andrew Ninian, Director of Stewardship, Risk and Tax, said: 

“The UK Stewardship Code has been instrumental in promoting effective stewardship practices, enhancing transparency, and supporting long-term value creation for end savers. The proposed revisions to the Code represent an opportunity for the UK to lead globally by balancing growth, competitiveness and high standards of corporate governance and stewardship.  

“The revised definition of stewardship is supported by the majority of Investment Association members, as it focuses on financial materiality and the role of stewardship in delivering long-term value for clients, while also meeting their broader investment objectives. The streamlining and flexibility within the new Code recognises that there is no one-size fits all approach and that different signatories will conduct stewardship depending upon their business model, investment strategies and client expectations.”  

Executive summary from the IA response

• Definition of Stewardship – The majority of members support the revised definition, which emphasises delivering returns for clients while accommodating their broader investment objectives. However, concerns remain regarding the term “sustainable”, which is a restricted term under FCA Naming and Marketing Rules. To avoid unintended compliance risks, we recommend that the FRC and FCA work together to promote regulatory alignment and publicly clarify whether a stewardship report acts as a “financial promotion” under the Rules. Some members do not support the removal of the benefits to the economy, the environment and society from the definition. They believe that this change removes the connection with the positive externalities of stewardship and de-emphasises the importance of long-term systemic risks that investors are exposed to. However, on the whole members believe that there is enough flexibility in the definition to still pursue these aims where they align with clients’ investment objectives. It is important that the FRC delivers a definition which the whole market can support, so that we do not have different actors in the investment chain using different definitions. 

• Streamlined Reporting Structure – The proposed split between a Policy & Context Disclosure and an Activities & Outcomes report is a positive step towards improving transparency and usability of reporting. However, requiring annual submission and republication of the Policy & Context disclosure could inadvertently increase compliance burdens. We recommend submission every three years, unless there are material changes. 

• Principles, Prompts & Guidance – The revised reporting structure provides greater flexibility and relevance for signatories. We recognise the risk that overly descriptive guidance could lead to a tick-box approach to reporting. To ensure practical implementation, industry stakeholders should be consulted on the guidance before it is finalised. 

• Principles for Proxy Advisers & Investment Consultants – We support the differentiation of stewardship expectations for service providers. Greater transparency on proxy advisors’ research methodologies and voting recommendations will benefit clients, while investment consultants should clearly articulate how they assess stewardship in manager selection. Improved disclosures will help reduce excessive bespoke reporting requests that currently burden investment managers. 

• Principles on Engagement, Collaboration & Escalation – Folding engagement, escalation, and collaboration into a single principle provides useful flexibility and reflects existing market practice in reporting, reducing incentives for unnecessary disclosure.  

• Market-wide & Systemic Risks – While we welcome the retention of a Principle on systemic risks, the accompanying text should be revised to remove the expectation that all investment managers must address these risks directly. Stewardship plays a role in identifying and mitigating systemic risks for clients, but the responsibility for addressing systemic risks and solutions ultimately lies with policy makers.