PLSA backs FRC’s consultation on new Stewardship Code

The Pensions and Lifetime Savings Association has welcomed a consultation by the Financial Reporting Council on a new Stewardship Code that sets out higher expectations for investor stewardship policy and practice.

The new code will focus on how effective stewardship delivers sustainable value for beneficiaries, the economy and society. It aims to increase demand for more effective stewardship and investment decision-making, which is better aligned to the needs of institutional investors’ clients and beneficiaries.

PLSA policy lead, investment and stewardship, Caroline Escott, noted that as investors, pension schemes are “ideally placed” to take the long-term approach to investing savers’ money. Therefore, she said it’s vital that schemes and their managers work together to be good stewards to protect and enhance the value of people's savings.

“The UK has long been seen as a global leader on stewardship issues and the Stewardship Code has played a key part in this. However, there is room for improvement and we're pleased to see that many of these new proposals are in line with what our members have been calling for. Ensuring the code clearly explains how the principles apply to asset owners should make it easier for them to make sure their asset managers are undertaking effective stewardship,” she said.

In its consultation, the FRC has proposed several main changes to the code. For example, purpose, values and culture, where investors must report how their purpose, values and culture enable them to meet their obligations to clients and beneficiaries. This would align the code with the UK Corporate Governance Code and encourages embedding behaviour conducive to effective stewardship in the investor community, the FRC stated.

An area that the PLSA particularly welcomed specific reference to is environmental, social and governance (ESG) issues. The proposed code now refers to ESG factors. Signatories are expected to take material ESG issues into account when fulfilling their stewardship responsibilities. Escott noted that ESG issues “can represent significant risks and opportunities to companies, so it's important these are drawn out”.

The FRC has also proposed stewardship beyond listed equity; if the code is approved it would expect investors to exercise stewardship across a wider range of assets where they have influence and rights, in the UK and globally.

In addition, the proposed code sets out more rigorous requirements for reporting, focusing on how stewardship activities deliver outcomes against objectives. Reporting will be subject to increased oversight by the FRC to ensure the code is effective in raising the quality of stewardship across the investor community.

In preparing the consultation the FRC has engaged with 170 members of the investment community and companies, including the largest UK asset managers, pension funds, key international investors and UK listed companies.

Commenting, FRC chair, Sir Win Bischoff, said: “The new Stewardship Code will play a key role in complementing the stronger corporate governance provisions that took effect at the start of this year. The FRC conducted extensive outreach in early 2018 to inform this review of the Stewardship Code.

"It recognises the significant changes in the investment industry and stewardship landscape since the 2012 revision. It sets both higher expectations for stewardship practice and introduces more rigorous public reporting with a focus on outcomes and effectiveness. We believe the changes proposed put it at the forefront of stewardship internationally.”

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