The Financial Reporting Council’s (FRC) proposed amendment to the definition of stewardship in the launch of its Stewardship Code consultation has created much division within the investment community.
The amended definition of stewardship is to become “the responsible allocation, management and oversight of capital to create long-term sustainable value for clients and beneficiaries”, with the phrase “leading to sustainable benefits for the economy, the environment and society” being deleted on the basis that some interpreted its inclusion as meaning that the primary purpose of stewardship is to pursue environmental and social objective in and of themselves.
The FRC noted in its launch: “Amending the definition of stewardship to support more transparent conversations between actors in the investment chain about their investment beliefs and objectives, while being sufficiently broad to be applicable to signatories across the investment chain and dif- ferent asset classes.”
James Roe, a partner at law firm A&O Shearman, expressed his support for the move. “We believe that the revisions, if adopted, have the clear potential to improve engagement between listed companies and their shareholders resulting in greater longer-term value,” he said.
Roe and his colleagues at A&O Shearman noted in a wider response: “In our discussions with clients and other industry participants, it was evident that there are different views as to what stewardship is and what it is intended to achieve.”
This often, noted the law firm, stems from an incomplete picture of the stewardship landscape – the “stewardship ecosystem” – and the commercial incentives driving the behaviour of engagement by individual stewards.
Roe added: “The removal of outcomes also recognises that outcomes may occur over longer periods and may be more subtle. Guidance will also ensure that reporting on outcomes is not too narrowly understood and does not drive short term activities to meet a reporting requirement.”
Roe also noted that the FRC recognises that some signatories may follow other reporting frameworks or requirements that align with content of the code.
Significant shift
Highlighting how the changes could impact responsible investment, the Responsible Asset Owners Global Symposia wrote: “The FRC’s proposed revisions to the Stewardship Code represent a significant shift in the UK’s approach to responsible investment. While the long-term implications remain uncertain, it’s crucial for investors to navigate this evolving landscape with a clear understanding of their responsibilities.”
But Fergus Moffatt, head of UK policy at Share Action, was scathing about the changes. “It’s concerning that one of UK’s most important regulators is suggesting amending the definition of stewardship in the Stewardship Code to remove explicit references to social and environmental outcomes,” he said.
Moffatt then added: “The Stewardship Code sets high standards for those investing money on behalf of UK savers and pensioners and those who support them. It’s designed to make sure investors are safeguarding the interests of these savers and asset owners through the influence they have over the companies they invest in.”
Moffatt instead noted: “Responsible stewardship must include consideration of companies’ impact driving dangerous levels of global heating, inequality and poor public health on the future savers will retire into.”
Cutting through the debate, Frances Deakin, head of responsible investment at Local Pensions Partnership Investments, offered up her own definition: “Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries contributing to sustainable benefits for the economy, the environment and society.”
Setting standards
The FRC has also stated that reporting is to be split into two parts, with one: policy and context disclosure, to be updated only as necessary, though still submitted annually, and the other: activities and outcomes report, to be produced annually. The current code carries some weight within the investment world as it has 273 signatories representing approximately £45trn in assets, setting standards for investors.
The FRC has something of a tough task in making sure that what it puts forward has teeth, but at the same not adding to what some see as an increasing regulatory burden.
But Moffat thinks the FRC should reconsider the whole approach to changing the definition. “Share Action is calling on the Financial Reporting Council to scrap this proposed redefinition of stewardship and stick to its original, which clearly references the key role investors have to play in addressing interrelated social and environmental challenges, by placing climate change and social impacts at the heart of effective stewardship standards.”
What happens when the consultation closes will be interesting, and whether the FRC can placate the differing views could present a challenge. Investors wanting a say on the proposed revisions to the code have until mid-February to do so.
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