Setting standards of stewardship

GUARDIANS OF MARKET INTEGRITY - Investors need to be engaged stewards of the assets entrusted to their care

Setting standards of stewardship Ethical BoardroomBy Claudia Chapman – Head of Stewardship, Financial Reporting Council



The Financial Reporting Council’s (FRC) new UK Stewardship Code 2020 took effect on 1 January 2020 and sets a high bar for stewardship performance and reporting of those investing money on behalf of UK savers and pensioners.

The Code defines stewardship as 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. The changes to the Code mean it is now at the forefront of stewardship internationally.

The role of stewardship

Now more than ever, with the ongoing Covid-19 crisis and the impacts of climate change becoming more visible, investors have an important role to play in engaging with companies to improve governance, behaviour and other areas that impact long-term value. There is no doubt that increasing societal expectations and regulatory pressure are placing greater scrutiny on how investors look after the assets entrusted to their care – such as the pensions and investments of UK savers.

There is a clear and consistent expectation that environmental, social and governance (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 FRC’s Stewardship Code offers a real opportunity for its signatories to demonstrate the impact of their stewardship activities on a wide range of stakeholders.

The 2020 Code is an ambitious update to the 2012 version and recognises the significant changes in the investment landscape in that time. In revising the Code, the FRC has redefined stewardship through extensive consultation with a broad range of stakeholders, including pension funds, non-governmental organisations, industry bodies, asset managers, companies and other regulators.

The Code focusses on the activities and outcomes of stewardship, not just policy statements, and investors are expected to exercise stewardship across asset classes. For example, for listed equity, fixed income, private equity, infrastructure investments, and in investments outside the UK.

There are also expectations about how investment and stewardship is integrated, including environment, social and governance (ESG) issues. Ultimately, the Code seeks to: align objectives and incentives across the investment community; widen the application of stewardship practices to all assets under management; encourage better communication to beneficiaries and clients; and systematically integrate stewardship into investment decision-making.

Aligned to the UK Corporate Governance Code, the Stewardship Code now includes new principles that place a strong emphasis on purpose, culture and values, as well as ensuring stewardship is effectively governed and resourced within the organisation. Investors must also explain how their resourcing and use of third parties to support their stewardship is appropriate, the training they provide, the diversity of teams and how teams are appropriately qualified and incentivised. They are also required to demonstrate how they set expectations and hold to account the third parties they use.

Meaningful engagement

Although there is an increased focus on investors demonstrating effective stewardship, the Code is careful to encourage meaningful and better-quality engagement with companies. Quantity does not equal quality and, so, investors should explain how they select and prioritise issues for engagement, and their process for escalating a concern with an issuer. Companies may want to consider if the expectations that the Code and new rules from the Shareholder Rights Directive (SRD II) place on investors offer a renewed opportunity to engage with them. We often hear from companies that they invite investors to meet them but they only hear from a select few, or if there’s a problem. Changing laws and expectations for asset owners to incorporate material ESG into investments and changing public expectations of companies should present opportunities for companies and investors to better engage to meet these expectations.

‘Aligned to the UK Corporate Governance Code, the Stewardship Code now includes new principles that place a strong emphasis on purpose, culture and value’

The Code consists of 12 principles for asset managers and asset owners and six principles for service providers, such as proxy advisors, investment consultants and data providers. It encourages organisations to be transparent about what they do and why they do it and does not prescribe a single approach. Organisations need to demonstrate how they have applied the principles of the Code by submitting a report every 12 months. This includes addressing the reporting expectations, which are divided into three types: context, activity and outcome.

Context provides background information for understanding the application of the principle, such as an explanation of the key features of a policy or approach. Activity identifies the actions taken by the organisation during the reporting period to fulfil the principle. Reporting should seek to balance breadth and depth in explaining their approach by making use of a combination of data, examples, case studies, charts and diagrams. Outcome explains the result of the actions taken during the reporting period.

Review of early reporting

The first official Stewardship Reports will be published in early 2021, but there are already examples of asset managers and asset owners who have started to align their reporting to the new Code. To support prospective signatories in meeting the higher expectations set by the Code, the FRC has published a Review Of Early Reporting. The purpose of our review is to support prospective signatories in meeting the new reporting challenges. It offers a wealth of practical guidance based on real examples that prove what is doable.

Setting standards of stewardship Ethical Boardroom
BETTER REPORTING – The FRC’s analysis shows positive engagement with the new Stewardship Code

The review involved analysing 21 responsible investment, active ownership and stewardship reports, and looked at how well prospective signatories are addressing the higher standards that have been set. The review highlights what has been reported well, using examples to demonstrate a range of effective approaches, and highlights areas where reporting needs to improve. Although most of the reports reviewed were from asset managers, many of the points made are relevant to asset owners and service providers. The results are really encouraging. It is a good sign that prospective signatories are already working hard to meet the requirements of the new Code and review what they do, how they do it, and how they report on it. However, there are also areas where reporting will need to improve to meet our high standard.

The review revealed good examples and case studies demonstrating stewardship activity, with some reports identifying outcomes well, particularly in relation to engagement and collaboration. We also saw good examples of reporting on how organisations are integrating stewardship, ESG and investment. Better reporting makes good use of both quantitative and qualitative information – quantitative reporting giving a sense of how consistently the approach is applied, while examples and case studies can provide depth and insight into how this works in practice. We saw some good graphical representations of information, including processes, engagement reporting and vote summary information. Better quality reports clearly explain their organisation’s purpose and beliefs and provide distinctive reporting that connects this to their stewardship practice during the reporting period.

We saw some encouraging examples of reporting, where investors were able to share expertise with a company and work collaboratively to achieve positive change that was in the interests of the company, the investor and the ultimate providers of capital.

A bigger opportunity

However, there is a lot of scope for prospective signatories to really enhance their practice and reporting. Firstly, all reports need to explain how they have applied all the principles and reporting expectations of the Code (apply and explain). We’re also looking for reports to provide evidence that demonstrate an organisation’s approach, and to back up statements about activity. This is key as we move away from policy statements and towards activity and outcome reporting. Also, it would be great to see more reporting across different asset classes, so clients and savers who are invested in bonds, real estate or multi-asset funds can also see what is happening here. Even in listed equities, we would like to see more reporting about the differences in approach taken. While there is a lot of explanation about stewardship in ESG, sustainability or responsible investment-focussed funds, we would really like savers in all types of funds to be able to understand how stewardship has worked for them. We want reports to be fair, balanced and understandable, not only by being transparent about how developed an organisation’s stewardship approach is across asset classes and geographies, but also by acknowledging setbacks as well as successes, and identifying areas for improvement in the future.

‘Moving forward, we would encourage company directors to speak with their investors to understand their expectations and how they may have changed as a result of the new Code’

Overall, our early reporting review tells a positive story and we hope that prospective signatories to the Code find it helpful as they think about their reporting. The FRC commends those investors who have already begun to align their reporting to its principles. We are encouraged by the number of investors who have engaged with the spirit of the Code and used it as a framework to review their practices and reporting. We were pleased that reports made a serious attempt to apply and report on the Code, and we see encouraging examples of good reporting. We really want the first set of reports to be high quality, informative and to help shine a light for savers and beneficiaries on how the industry is making their money work for them.

The review reiterates the expectations for effective stewardship, explains what we expect to see from reports, and highlights good examples where we have found them. It will be a key tool to help applicants prepare their new stewardship reports and reinforce the UK’s reputation as a centre for excellence in stewardship. Widespread adoption by the investment community will reinforce the attractiveness of the UK as a place to do business and deliver real benefits to the economy, the environment and society more broadly.

Moving forward, we would encourage company directors to speak with their investors to understand their expectations and how they may have changed as a result of the new Code. Discuss with investors what information they may require now that the Code’s focus on engagement across asset classes may mean greater focus from investors on fixed income as well as equity stewardship. Directors also need to consider how to constructively engage before issuing or reissuing debt. For investors hoping to apply next year, they should read the Code’s principles and reporting expectations carefully, ahead of writing their reports. They should also consult the review of early reporting to understand what they should concentrate on in preparing their reporting.

Our website has a wealth of information about the Code and investors can contact us directly if they have further questions by emailing

We will continue to monitor the Code’s effectiveness as a tool to promote high standards of stewardship practice and will engage with companies and other stakeholders to understand the impact on the quality of conversations.


About The Author:

Claudia joined the Financial Reporting Council in 2015 to deliver a report on Corporate culture and the role of boards which led to revisions of the UK Corporate Governance Code. Most recently she led the review and update to the UK Stewardship Code which took effect on 1 January 2020. Prior to that Claudia spent nine years at ACCA (the Association of Chartered Certified Accountants) in business development and policy roles, latterly, leading a campaign to raise corporate governance standards in developing markets and bringing together finance and HR to address inclusion and diversity in organisations.