What is the UK Stewardship Code?
What is Stewardship?
Investor stewardship is a defining feature of modern sustainable investment strategies. Most commonly, stewardship refers to how institutional investors engage portfolio companies on environmental, social, and governance (ESG) issues and how they use their position in the investment chain to promote sustainability. Today, major institutional investors like BlackRock and State Street Global Advisors publish quarterly stewardship reports showcasing their engagements with companies on ESG issues and there are more than 20 countries with stewardship codes.
“Stewardship is 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".
What is the UK Stewardship Code?
The UK Stewardship Code 2020 sets a new standard for those investing money on behalf of UK savers and pensioners, setting expectations for stewardship activities and outcomes, not just policy statements. Overseen by the Financial Reporting Council, the Code consists of 12 Principles for asset managers and asset owners, and six Principles for service providers. Signatories to the code must issue an annual Stewardship Report explaining how they have applied the Code in the previous 12 months.
The Code is applicable across different asset classes, recognizing that investors have different investment periods, rights, and levels of influence. Signatories are encouraged to use the mechanisms available to them (e.g. direct engagement with issuers, voting, contractual arrangements, etc.) in order to fulfill their stewardship responsibilities. Stewardship reporting should reflect the mix of asset classes of the signatory in a proportional manner. For instance, an organization invested 50% in equities and 50% in fixed income should report on both.
What are the UK Stewardship Code Principles for asset owners and asset managers?
The UK Stewardship code 2020 sets out the following 12 principles for asset owners and asset managers:
Signatories’ purpose, investment beliefs, strategy, and culture enable stewardship that creates long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society
Signatories’ governance, resources and incentives support stewardship.
Signatories manage conflicts of interest to put the best interests of clients and beneficiaries first.
Signatories identify and respond to market-wide and systemic risks to promote a well-functioning financial system.
Signatories review their policies, assure their processes and assess the effectiveness of their activities.
Signatories take account of client and beneficiary needs and communicate the activities and outcomes of their stewardship and investment to them.
Signatories systematically integrate stewardship and investment, including material environmental, social and governance issues, and climate change, to fulfil their responsibilities.
Signatories monitor and hold to account managers and/or service providers
Signatories engage with issuers to maintain or enhance the value of assets.
Signatories, where necessary, participate in collaborative engagement to influence issuers.
Signatories, where necessary, escalate stewardship activities to influence issuers.
Signatories actively exercise their rights and responsibilities.
In order to become a signatory to the Code, organisations are required to apply all relevant Principles and explain how they have done so over a 12-month period (“apply and explain”).
Market progress in Stewardship Reporting
The Financial Reporting Council conducted an early review of Stewardship Reporting to evaluate progress and provide guidance for future reporting. Key insights from the review include:
Effective Stewardship Reports combine data, examples of stewardship activities, and case studies
Reporting for listed equities was more mature than other asset classes
There was much less evidence of engagement activities in asset classes other than listed equities