The Financial Reporting Council (FRC) has proposed a new definition of stewardship as part of a consultation on updates to the UK Stewardship Code that also include dropping escalation as a standalone principle.
The consultation on the Stewardship Code, which already includes a reworked stewardship definition, builds on interim measures announced in July that focussed on reducing annual reporting requirements.
In this week’s consultation, the proposed new definition of stewardship drops a reference to it “leading to sustainable benefits for the economy, the environment and society”, instead referring to its aim being “to create long-term sustainable value for clients and beneficiaries”.
The proposed removal of explicit references to social and environmental outcomes was promptly criticised by NGO ShareAction, with head of UK policy Fergus Moffatt saying the FRC should stick to its current definition.
Lindsey Stewart, director of investment stewardship research and policy at Morningstar Sustainalytics, however, said the proposed new definition “allows greater flexibility of application for signatories with a wide range of views on what priority sustainability issues should be given”.
“This will be particularly important to many of the signatories based in the US where pressure to demonstrate client focus on financial outcomes over societal ones has never been higher,” he added.
According to the FRC, a new definition is needed because “[s]ome stakeholders continue to interpret the existing definition to mean that purpose of stewardship is to pursue environmental and social objectives in and of themselves” when it is for each signatory of the Code to determine objectives beyond creating value for clients.
“While the role of the Code is to set high standards for stewardship and make stewardship approaches, activities and outcomes more transparent, it does not direct how signatories meet their fiduciary duty or direct how they invest their assets,” the FRC said in its consultation paper.
“The revised definition of stewardship reflects this.”
Differentiating expectations by signatory type
Other proposals outlined this week by the FRC as part of its full consultation include setting out clearer expectations for asset owners versus asset managers.
Reporting by those who manage assets directly should focus more on activities such as engagement with companies, the regulator said, while for asset owners who do not directly manage assets, reporting should focus more on oversight of their managers.
According to the regulator, this will “help to achieve more insightful reporting”.
“Currently, there are instances where we receive duplicated information about engagement case studies reported by both asset owners and their managers, that doesn’t bring out much information on the role of the asset owner overseeing the manager.”
The regulator has also proposed introducing principles to be applied specifically by proxy advisors and investment consultants, “to reflect the importance of the services they provide to clients in the stewardship ecosystem”.
Another change that has been proposed is to drop the current standalone principle on escalation, to reflect the regulator’s view that escalation “should be undertaken whenever necessary to achieve stewardship objectives, rather than being seen as an end in and of itself”.
The consultation is open until 19 February 2025.
“We are committed to maintaining the UK’s position as a global leader in stewardship standards and activities,”’ said Richard Moriarty, FRC chief executive officer.
“Our proposals reflect extensive stakeholder engagement the FRC has undertaken during 2024 and aim to reduce unnecessary reporting burden while ensuring savers and pensioners can better understand how their money is being managed on their behalf to create long-term sustainable value.”
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