FRC issues early review of UK Stewardship Code reports

Early review will help applicants prepare effective and clear stewardship reports

An early review of annual reports submitted to the Financial Reporting Council (FRC) as part of asset managers’ commitment to the UK Stewardship Code 2020 show encouraging signs of effective stewardship even amid the backdrop of Covid-19.

The UK Stewardship Code 2020 is a set of 12 principles for asset owners and managers, which took effect on 1 January 2020, to ensure they are meeting expectations on how they are managing money on behalf of savers and pensioners and how this leads to sustainable benefits for the economy, the environment and society.

Although reports are not due until Q1 2021, groups have already submitted early leading to the FRC publishing the report The UK Stewardship Code: Review of Early Reporting September 2020, to help further applicants prepare their own stewardship records.

Sir Jonathan Thompson, CEO of the FRC, commented: “We are encouraged by how many investors have engaged with the spirit of the Code and used it as a framework to review their practices and reporting. We encourage others to do the same. Thank you to all who have reported early. Well done on being leaders in the field and thank you for being receptive to our feedback.”

He added that in these “challenging and uncertain times” amid the ongoing impact of the Covid-19 pandemic, effective stewardship has a “critical role to play”.

“There is no doubt that increasing societal expectations and regulatory pressure place greater scrutiny on how investors are effective stewards of the assets entrusted to their care. There is a clear and consistent expectation that ESG issues, including climate impact, are included in stewardship and investment decision making.

“A new social contract is emerging as we all look to build back better, and the Code offers a real opportunity for signatories to demonstrate the impact of their stewardship activities on a wide range of stakeholders.”

Ashley Hamilton Claxton (pictured), head of responsible investment at Royal London Asset Management (RLAM) and editorial panellist for ESG Clarity also commented:  “The Covid crisis has rapidly increased expectations that investors act responsibly as recovery starts to take shape and it’s good to see that they are holding their side of the deal.

“We welcome the publication of the early review of this year’s reporting under the Stewardship Code from the FRC. The assessment underscores the crucial role that stewardship will continue to play in helping enable better outcomes for investors, along with the role which asset managers are playing in helping to encourage this positive change.”

Early Review summary

In the 63-page report, the FRC highlighted the most significant change in to the 2020 Code is that signatories were required to annually report on the activities they undertake to fulfil their stewardship responsibilities and the outcomes of this activity, with evidence and case studies.

The early review said groups supplied “good examples and case studies evidencing stewardship activity with some reports identifying outcomes well, particularly in relation to engagement.

Providing tips for future reports, the document said: “Better reporting makes good use of both quantitative and qualitative information – quantitative reporting giving a sense of how consistently the approach is applied, and examples and case studies providing depth and insight into how this works in practice.”

It also said the Code encourages organisations to be transparent about “what they do and why they do it”.

Room for improvement

The FRC does not prescribe a single approach and, as a result, the quality of reports varied with few covering all 12 Principles.

“Some did not respond to all the Principles, and most did not cover all the reporting expectations that sit underneath.

“In cases where there is a strong reason why a reporting expectation does not apply, applicants should explain this reason, rather than simply ignore it in their disclosure.”

It also said reporting needs to improve by reflecting on “effectiveness of approach, demonstrating continuous improvement and disclosing outcomes”.

The review encouraged groups to choose the “reporting expectation most appropriate for their business” and said reports should be a “single document structured to give a clear picture of how the organisation has applied the Code.”

“We saw a variety of approaches to structuring the reports,” the early review said.  “Some chose to report Principle by Principle, dividing the report into separate sections for each Principle and including all relevant reporting in each section. Others chose to align their existing active ownership, stewardship or responsible investment report with the Code. We saw effective examples of both approaches.

“A Principle by Principle approach tended to address all the Principles and reporting expectations. However, reporting did not always draw the connections that exist within the Code and in some cases there was a greater emphasis on policy, rather than a reflection of the activity and outcomes for the reporting period.”

They also urged groups to avoid jargon and consider their audience’s needs, while also said lengthier reports did not necessarily mean better quality.

“We saw a variety of report lengths (between 25 and 80 pages), reflecting different approaches and styles adopted by organisations. We did not find a direct link between the report’s length and its success in reporting against the Code,” it noted.

It also highlighted reports including self-assessment of the effectiveness of a chosen approach as well as the result of their actions in engagement were helpful inclusions.

The review published a number of case studies from groups such as Aviva Investors, RLAM, Schroders, Brunel Pension Partnership, HSBC Global Asset Management and more, which can be viewed here.


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...