Launch of UK Stewardship Code Consultation

Published: 11 November 2024

12 minute read

In this FRC In-Conversation, our Director of Stakeholder Engagement and Corporate Affairs Kate O'Neill, sits down with Executive Director of Regulatory Standards, Mark Babington and Head of Stewardship, Andrea Tweedie, to discuss the significant changes to the UK Stewardship Code that are being proposed and how they strike an important balance between supporting economic growth and investment, delivering increased transparency for millions of UK investors, savers and pensioners, while also reducing the reporting burden for signatories.

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Transcript

0:10
Hello there and welcome to another FRC in Conversation podcast.

0:14
My name is Kate O'Neill.

0:16
I'm the Director of Stakeholder Engagement and Corporate Affairs here at the FRC.

0:19
And today I'm joined by Mark Babington, the Executive Director of Regulatory Standards and Andrea Tweedie, Head of Stewardship at the FRC, because today we have published the public consultation document of the suggested changes to the Stewardship Code.

0:36
So Mark, starting with you, can we give our listeners a bit of a quick canter through brief history of the Stewardship Code, what it is and who it's for?

0:46
So Kate, we've been setting the Stewardship Code now for nearly 15 years and something that started off as an industry driven initiative, but the view was taken several years ago that it would be better if the Stewardship Code was set independently.

0:59
So what it's focused on is the stewardship work that asset owners and asset managers and others undertake to ensure long term growth of investments.

1:11
So if you're a pensioner, if you have savings, stewardship is critical to ensuring that you get good returns.

1:18
And this is the latest iteration of the code.

1:21
As you know, we've done a lot of feedback and engaged with a lot of stakeholders and we're hoping that our stewardship code will continue to be world leading.

1:30
Thanks for that, Mark and Andrea.

1:31
As Mark pointed out, we announced that we were reviewing the code at the start of the year.

1:36
So what have we been doing in say the last eight months or so because it's today that we're publishing the formal consultation?

1:44
Yes, that's right Kate.

1:45
We have done some fairly extensive engagement with our stakeholders prior to even releasing the consultation actually.

1:53
So what we've been doing is plenty of round tables to understand our stakeholders views on the Stewardship Code.

2:00
And this is a little bit of a different approach to how we've done it before and that's for a few reasons really.

2:05
So you know we've received plenty of stewardship reports in the past few years.

2:11
So we think we've got a really good idea of some places where the code is working really well, maybe some areas for improvement such as we've seen reports getting longer and longer.

2:20
But we really wanted to make sure that we knew from our stakeholders themselves how well they say the Stewardship Code was working and where there are opportunities for improvement.

2:30
And what we've done is we've taken everything that we've heard over the past few months as well as things that we've seen from all of the reporting to the code in its operation so far.

2:40
And that has all fed into what we're coming out with in the consultation.

2:44
OK, I guess to both of you.

2:46
I mean many regulators are accused, perhaps fairly or unfairly, that when you come out with a consultation document, you've already decided the outcome of what the changes will be.

2:56
Is that why we undertook this very long pre consultation.

3:01
Over the last six to eight months?

3:03
I mean, Mark, do you want to kick us off there?

3:05
I would say, Kate, we recognise that the Stewardship Code is really important.

3:10
The whole concept of stewardship is critical to driving growth and economic benefit, and it also makes the UK an attractive destination for investors.

3:20
We promised that this was going to be a fundamental review of the code, so it wasn't going to be just tinkering with a bit of drafting.

3:28
And so in the spirit of openness, we wanted to go out first and understand what did people think was working well, what did people think could benefit from change.

3:38
And one of the really important things for us is that our code is a global code.

3:43
Many global investors, global asset managers sign up to it.

3:46
So therefore it was important we did our research and gathered a really rich evidence base.

3:52
Andrea, I guess the investment management marketplace has changed dramatically since 2020 as well with the often mentioned growth of passive and tracker funds in both the UK and globally.

4:05
Yeah, that's exactly it, Kate.

4:07
So in the 2020 version of the Stewardship Code, it was opened up to apply across our signatories assets under management.

4:15
And that was really reflecting the fact that if we're looking at linking this all back to that end saver and beneficiary, what they're invested in has changed a lot over the past few years.

4:25
And we think it's really important that the Stewardship Code provides the right amount of space that we can see our signatories reporting on what they're doing in stewardship across those different asset classes and across investment styles as well.

4:38
So that'll still be a really important thing that we want to see signatories doing to the code that we've proposed in the consultation today as well consultation and mentions a refined definition of stewardship that emphasises creating long term sustainable value for those underlying beneficiaries that Mark mentioned pension holders, ISA holders, savers.

5:00
Can you explain what this mean and why is that the really kind of key focus of this important update?

5:07
Yeah, absolutely.

5:08
So we are proposing to revise the definition of stewardship in the code.

5:12
And that definition we've included in the consultation emphasises that the primary objective of stewardship is to support sustainable value for clients and beneficiaries.

5:22
And also we completely understand that effective stewardship may lead to those secondary wider benefits for the economy, environment and society.

5:30
And of course that can in turn support sustainable value and that primary aim.

5:35
But really it's the role of investors to determine what factors and material to delivering sustainable returns for their clients and then use their stewardship effectively to do that.

5:46
And that's really where we want to have the definition go.

5:49
I guess different fund managers do stewardship in different ways, which the Code absolutely recognises exactly

5:57
And the definition we're proposing is intended to support better and more transparent conversations as well between actors in the investment chain about their investment beliefs and objectives.

6:08
And we believe this revised definition is sufficiently broad to be applicable to signatories with different views across the investment chain and different asset classes.

6:18
Mark, one of the proposals is to streamline the reporting process by separating policy and activity disclosures for those listeners who are less close to stewardship and the code.

6:30
Why was that important to do?

6:32
Well, part of it, Kate responds to the work we've done to minimise burdens on signatories.

6:37
So for many signatories to the code, there will be standing policies that don't really change very often.

6:45
It's a sort of consistent way in which they do business.

6:48
So therefore we have changed the requirement to report annually on those to being a periodic report.

6:56
The thing that people are more interested in with stewardship is what have you actually done? What have you actually achieved as a result of your stewardship activity?

7:04
And therefore that's the thing that really investors are assessing when they're thinking about the effectiveness of stewardship.

7:12
So that's the thing that we want our signatories to focus their efforts on.

7:15
Tell us about the good things that have happened.

7:18
Don't spend an enormous amount of time and effort just repeating things that are the same as last year.

7:25
Andrea, I guess you and the team would want to say when you're assessing a signatories reporting that it's not activity for activity's sake to Mark's point that it's been done with purpose and an outcome expectation.

7:38
Yes, absolutely.

7:39
I think it's really important for us to make sure that people know what we're doing is some sensible streamlining.

7:46
But we are not lowering the bar in any way.

7:49
So really we're looking at how do we get more thoughtful reporting from our signatories who are preparing it and how do we make sure that it is really insightful reporting for their clients or other in the market who are going to be using it.

8:04
I guess we've already done some quick wins, some would say, Andrea, this year in July, we announced some interim measures around some reporting that we thought could be streamlined.

8:15
What do you say to those people who say, well, I've already started to adopt those?

8:19
Is there going to be a Cliff edge when the new herd comes into practise?

8:24
I would say that absolutely will not be a Cliff edge when a new code comes into practise.

8:29
We want to be really clear that signatories know there will of course be a transition period from the current code to the next one for our existing signatories.

8:38
Keep on doing what you're doing.

8:39
For 2025 reporting, we would look to have the updated code published in the first half of next year and then an effective date for reporting that comes in in 2026.

8:51
And we'll make sure that we put out enough information and material so signatories understand the updated code and what they need to do to report to it successfully.

9:00
I'm going to move on to a topic that a lot of people get very exercised by, but the code, as we're proposing in this consultation document, will now include principles specifically for proxy advisors and investment consultants before we explore why it's important to bring these service providers more directly into focus.

9:19
Mark, do you want to kick off and reminding listeners, proxy advisors and investment consultants do in relation to the stewardship chain?

9:27
And Andrea, please jump in where you want to bring anything to light that we may miss.

9:32
I suppose, Kate, you could look at it as they provide some of the oil that makes the system work.

9:37
So proxy advisors are there and provide a service that many asset managers and asset owners use to help them discharge their stewardship obligations.

9:47
But as a result, the market leans heavily both on proxy advisors and investment consultants for advice and input.

9:55
And because they're such an important part of the jigsaw, we've decided in this iteration to develop targeted principles for them to report against.

10:05
Because what they do is not the same as an asset owner, it's not the same as an asset manager, but they make a critical contribution to effective stewardship, and we want their reporting to be able to better target that and be more informative to the people who rely on them.

10:21
Andrea, you've listened to so many critics, proxy agencies and investment consultants, but a lot of that criticism is maybe misplaced.

10:28
It's more placed in not really understanding the role they have to play.

10:32
To Mark's point, they are appointed by asset managers to do the parts of stewardship that those asset managers perhaps don't have the resources to do themselves.

10:42
Yeah, that's exactly it, Kate.

10:44
I mean, I think we've heard a lot of different things during our engagement to date, but I think the importance of the services that are provided by proxy advisors and investment consultants has come through so strongly.

10:58
And so that's why with the code, what we're looking to do is have principles that are applied specifically by proxy advisors and some principles that are applied specifically by investment consultants because what they do is very different.

11:13
How they operate and the services they provide to their clients are really different.

11:17
So we want for this more targeted nature of the service provider code to support more insightful reporting on what these different service providers do and how they do support stewardship through the investment chain.

11:31
Thank you.

11:32
And Mark, would you hope that perhaps fund managers and the corporates they invest in would have some richer conversations about how fund managers use proxy advisors and investment consultants to perhaps clear up some of the misunderstandings about their role?

11:48
Yeah.

11:48
Well, I think, you know, in your question to Andrea, you sort of really got to the nub of the issue in the people place a lot of reliance on these providers, but there's but poor understanding really of what they do.

12:00
And there are a number of misconceptions about what they do.

12:03
And therefore, what we hope is the changes that we've made to the code to make it, you know, more targeted to the different types of stewardship activity that take place will provide for a better conversation and better transparency.

12:17
For the first time, the consultation mentions that we'll be issuing guidance to support the effective implementation of the code.

12:24
I guess at the FRC, we want people to understand the guidance is what it says on the 10.

12:29
It's not part of the code, but what types of guidance are we going to provide and what's our expectation on how it will help signatories interpret and apply the updated principles?

12:39
How are we going to look at this guidance?

12:41
Is it like touch?

12:42
Is it prescriptive?

12:43
How do you want people to look at it when they're applying it to the way they're doing stewardship?

12:48
So the guidance is intended to help indicate the range of information that signatories might want to include in their reporting for them to demonstrate their approach to applying the principles.

13:00
That's because we know there is no single way of exercising effective stewardship.

13:05
Clients and beneficiaries will have different investment beliefs, time horizons and strategies.

13:11
So what we're doing is supporting our streamlined principles with that guidance.

13:17
And so an example of this would be our approach to engagement.

13:21
So engagement is critical to effective stewardship.

13:24
And we know there's no one way to exercise engagement.

13:28
We know that collaboration with other investors to pull resources and escalating engagements when necessary are both really important ways to exercise stewardship.

13:38
And we've got a streamlined engagement principle rather than three separate principles, and it's supported by guidance that gives signatories more prompts.

13:48
So they really make the most of that opportunity to explain their approach.

13:53
And so it sounds a lot more like the FFIC will use guidance.

13:58
And of course, you and your team, Andrea, will perhaps be working in a more collaborative fashion with signatories to help people find their way to talking about their stewardship in a way that reflects the reality of the investment chain and of their activities.

14:15
That's exactly it.

14:15
And I think that's going to be an important role that the guidance can play because it's, you know, not directly subject to formal consultation.

14:23
And that's great because it can be a bit more agile for it to be changed and updated over time as it is appropriate.

14:31
Mark, we've spent almost eight months consulting, talking, gathering evidence and information.

14:36
This consultation.

14:38
Is a little more formal because we now have the principles.

14:41
So are we expecting to be surprised by anybody's response to the details in the conduct?

14:47
We hope that what we're putting out there, Kate, won't come as a surprise.

14:51
And indeed, we hope that when you look at the consultation document, it'll really clearly set out the rationale for the changes that we've made and also the importance of stewardship in underpinning investment in the UK.

15:03
But we're always willing to listen and we're always willing to talk to our stakeholders because even though we've done an enormous amount of effort to inform the consultation that we've developed, if there are new things that people become aware of or there are different stewardship practises, then we're always interested in hearing about them.

15:21
The one thing that I think has come out very strongly from all of the engagement that we've done to date is that people know that we're not prescriptive.

15:29
People know that we want to maximise the value of the code and of stewardship in that thing of making the UK an attractive investment destination.

15:38
And that will continue right through to the end of the consultation.

15:43
I think it's a very interesting point in both of you have been very strong on this in this podcast about how good stewardship, high standards of stewardship helps companies be better run and have better long term prospects for their investees.

15:57
And I guess a lot of people may not have realised the linkage between stewardship and growth and why it's important that the stewardship code works to keep standards high to underpin UK growth.

16:08
Either of you want to say a final comment on that before we close?

16:12
I suppose one thing I would say, Kate is that sometimes there's a lot of interest in different types of stewardship in the marketplace.

16:20
One of the things I don't think people realise is that over the last few years EU KS share of assets under management has grown and therefore it is an area where we have a competitive advantage and where we are genuinely offering world leading businesses.

16:36
And I think that is something that our stewardship code supports.

16:41
And I think the other thing is it's a one stop shop to help people deal with a multiplicity of regulatory obligations from different regulators and parts of government.

16:51
And that's why it's effective.

16:53
That's an important thing to remind our listeners.

16:55
We're just one of three regulators who is involved in the stewardship activities of investment managers, the others being the Financial Conduct Authority and the Pensions Regulator.

17:05
But I guess our role is about the reporting on stewardship and really, Andrea, making fund managers stand up behind the stewardship activities and approach that they say that they do.

17:18
Yeah, that's right, Kate.

17:19
The code is fundamentally about meaningful engagement and driving long term value creation and then reporting on those activities for your clients and beneficiaries.

17:30
And it's really important to remember that it's not about just ticking boxes.

17:35
So applying the principles and reporting against the code shouldn't be seen as just a compliance exercise or reporting for reporting sake, but rather the information that's provided in stewardship reports should support those rich conversations between actors in the investment chain and not just replace them with reporting.

17:55
Well, thank you both.

17:57
It sounds like this is a key jumping off point for all those interested globally in the next iteration of the UK Stewardship Code.

18:05
So please get involved or details of upcoming webinars, round tables, etcetera are on our website.

18:11
Thank you, Mark.

18:12
Thank you, Andrea, and here's to a fantastic consultation programme ahead.

18:17
Thanks, Kate.

18:18
Thank you, Kate.