Financial Reporting Council: Review of early reporting against new Stewardship Code

The Financial Reporting Council’s (‘FRC’) new UK Stewardship Code 2020 (‘The Code’) 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 is relevant for pension funds and insurers, asset managers and the third parties that support them. 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 first official Stewardship Reports will be submitted 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 Review’). 

The purpose of our Review is to support prospective signatories in meeting the new reporting expectations. It offers a wealth of practical guidance and includes examples that demonstrate good reporting and highlights areas for improvement. 

The review analysed 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 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. 

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. The review revealed good examples and case studies demonstrating stewardship activity, with some reports identifying outcomes well, particularly in relation to engagement and collaboration.

“There are already examples of asset managers and asset owners who have started to align their reporting to the new Code”

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 gives 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.

Despite some encouraging signs, there is a lot of scope for prospective signatories to enhance their practice and reporting. 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 their 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, investors need to demonstrate reporting across different asset classes – even if this approach or reporting is not as mature as for listed equity. Clients and savers who are invested in bonds, real estate or multi asset funds should 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-focused 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. 

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. 

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. 

The FRC will 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 Code’s impact on the quality of conversations.

Claudia Chapman is Head of Stewardship at the Financial Reporting Council.