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The Stewardship Code 2020 and enhancing long-term value for clients

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Just over 12 months ago, the Financial Reporting Council launched its revised Stewardship Code. We report on the changes that matter to you and your clients.

When the Financial Reporting Council (FRC) launched its updated UK Stewardship Code back in January 2020, it was a landmark moment.

First published in 2010, and revised again in 2012, the original Stewardship Code was the FRC’s response to the governance failings exposed by the global financial crash two years earlier.

In terms of best practice for company management and to help them operate responsibly, good governance and stewardship are crucial.

But ten years on, the FRC has made it clear that the future of stewardship is about more than holding companies to account.

At the launch of the new Code, the FRC said it: ‘establishes a clear benchmark for 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’.

Why the Stewardship Code 2020 matters to advisers

The Stewardship Code 2020 sets a substantially higher standard than the original Code. It reflects the significant developments in sustainable investment over the past few years and the changing expectations of investors as more and more people want to know their money is being invested responsibly.

And with the revised Code’s focus on protecting the interests of UK savers and pensioners, and the emphasis on creating long-term value, the Stewardship Code matters to advisers.

For the first time, the Code goes beyond recommendations for asset managers and includes asset owners and service providers too.

These companies sign up to the FRC’s Stewardship Code voluntarily as a demonstration of their commitment to its goals. Therefore, being able to talk about the Code, and the organisations signed up to it, may increasingly become a valuable part of advisers’ client conversations.

Call for greater transparency and disclosure

The Stewardship Code 2020 calls for greater transparency and disclosure than the original and sets new expectations around how investment and stewardship should be integrated. This includes the FRC’s expectations around environmental, social and governance (ESG) issues.

The updated Code is made up of six principles for service providers and 12 separate principles for asset managers and asset owners that cover:

  • purpose and governance
  • investment approach
  • engagement
  • exercising rights and responsibilities.

The Stewardship Code 2020 now requires companies to report annually on their actions and provide evidence of how they’ve applied the Code over the past year. Once reports are submitted to the FRC, it carries out assessments and the companies that pass can remain as signatories to the Code.

Signatories’ reports should include engagement with the assets they invest in, their voting records and how they have enhanced the value of their investments. This greater transparency will allow clients to see how their interests are being served.

Other key changes to the Code include:

  • ESG investment principles. Signatories will be expected to take ESG factors, including climate change, into account and to ensure investment decisions are aligned with the needs of their clients.
  • Stewardship across asset classes. Signatories are now expected to explain how they have exercised stewardship across asset classes beyond listed equity, such as fixed income, private equity and infrastructure, and in investments outside the UK.
  • Demonstrating stewardship. Signatories are required to explain their organisation’s purpose, investment beliefs, strategy and culture and how these enable them to practice stewardship. They are also expected to show how they are demonstrating this commitment through appropriate governance, resourcing and staff incentives.
  • The new Code also expects signatories to work together with regulators and industry bodies to identify and respond to the risk of market and systemic failure.

     

    Pushing the industry to rethink stewardship

    The Stewardship Code 2020 is an important step in pushing the investment industry to rethink its approach to stewardship and how it manages investments for clients.

    With its improved governance for long-term sustainable investments, the Code raises the bar in terms of the standards and expectations of the industry.

    Most importantly for advisers, it establishes a clear benchmark for stewardship to enhance long-term value for clients, leading to sustainable benefits for the economy, the environment and society too.

    The FRC has made sure its Stewardship Code 2020 is fit for the future.

    Speak to your usual Standard Life contact if you need more information about responsible investment and stewardship or view our blog on Responsible investment: a regulatory and client necessity.

    The value of investments can go down as well as up, and could be worth less than originally invested.

    The views expressed in this blog should not be regarded as financial advice.