Revised and Strengthened UK Stewardship Code sets new world-leading benchmark
Nigel Mills summarises some of the changes in the new Code and the impact it will have. One key change is that signatories now have to explain their Stewardship approach in their alternative investments such as PE and Infrastructure.
The Financial Reporting Council (the FRC) launched a significant and ambitious revision to the UK Stewardship Code at the end of October 2019. The Code was last updated in September 2012.
The Code was originally introduced to enhance the quality of engagement between investors and companies to help improve long-term risk-adjusted returns to shareholders.
The new Code (the UK Stewardship Code 2020) substantially raises expectations regarding how money is invested on behalf of UK savers and pensioners.
The new Code focuses on protecting the interests of UK Savers and pensioners by seeking to ensure that their money is managed (and invested) responsibly with a new emphasis on creating long-term value and while doing so, considering sustainable benefits for the economy, the environment and society.
The FRC’s Chief Executive, Sir Jon Thompson said “I encourage institutional investors, asset managers and their service providers to sign up to the new Code and demonstrate that they are operating across their businesses to these high standards of Stewardship.”
The new Code contains 12 principles for asset owners and asset managers and six separate principles for service providers. Each principle is supported by reporting expectations which indicate the information which a signatory to the Code should include in its Stewardship Report. The structure is different from that adopted by the UK Corporate Governance Code (which relies on principles and supporting provisions).
The new Code makes it clear that: Environmental, particularly climate change, and social factors, in addition to governance, have become material issues for investors to consider when making investment decisions and undertaking stewardship.
Signatories are now expected to explain how they have exercised stewardship across asset classes beyond just listed equity, such as private equity and infrastructure and in investments made outside the UK.
The Code is voluntary and operates on a comply-or-explain basis. The Financial Reporting Council monitors compliance with the Code.
Whilst the Code is voluntary, there is no doubt that the pressure is on for all UK asset managers to sign up to it, whether it be in connection with their listed investments or their unlisted ones. Asset managers are required under the FCA COBS to disclose the nature of their commitment to the Code or, where they do not commit to the Code, their alternative investment strategy.
It does appear that the very large majority of the traditional UK fund management community have already signed up to the Code. This includes many UK hedge fund managers.
However, there seems to be a large number of PE fund managers that have not yet signed up. We would suggest that those businesses will need to consider doing so.
For further information contact Nigel Mills.