FRC announces update to Stewardship Code

On 22 July 2024, the Financial Reporting Council (FRC) announced major changes to the UK Stewardship Code (the Code) application process and set out five priority areas that the FRC will focus on in the review of the Code. This announcement follows the FRC launching a review of the Code in February 2024.

Area of focus for review of the Code

The five areas of focus are:

• Purpose – the FRC will set out its expectations for what defines effective stewardship and how reporting can help deliver this.

• Principles – the FRC will consider the reporting that is necessary to fulfil the Code's renewed purpose and look at ways to streamline the Principles and reporting expectations.

• Proxy Advisors – the FRC will consider how the Code can enhance the transparency of proxy advisors' activities.

• Process – the FRC recognises that preparing reports is time consuming and therefore it will consider how to reduce the reporting burden (whilst ensuring that reporting meets the needs of stakeholders).

• Positioning – The FRC will work closely with other regulators such as the DWP, TPR and FCA to ensure that the Stewardship Code considers other regulatory requirements and avoids duplication.

Changes to the application process and reporting

The FRC has also announced interim changes designed to reduce the reporting burden on existing signatories which will apply for the next application window (31 October 2024), and until the formal implementation of a new Code in 2026. These changes relate to what signatories are required to report and how they can report this information. In summary, the changes:

• Remove the annual disclosure requirements for 'Context' reporting expectations for existing signatories, except where there are material changes to previous disclosures.

• Remove the requirement for Asset Mangers and Assets Owners to make an annual disclosure against 'Activity' and 'Outcome' reporting expectations for Principles 1, 2, 5 and 6 (except where there are material updates).

• Allow cross referencing to disclosures in an existing signatory’s most recent report with no need to repeat in the new report, where there have been no material changes. This applies to the “Context” reporting expectations and “Activity” and “Outcome” reporting expectations for Principles 1, 2, 5 and 6.

The changes reflect concerns raised by stakeholders this year about the resource required for reporting to be a Code signatory. These changes apply only to existing signatories and are designed to help reduce reporting ahead of the consultation and release of a new Code. The FRC has published a set of short FAQs with some additional information on these changes.

The FRC has also taken the opportunity to:

• Clarify expectations of what constitutes an 'outcome' for stewardship purposes explaining that ‘outcomes’ can be demonstrated by positive, constructive, ongoing engagement as well as informing investment decisions and changes made by an issuer as a result of engagement.

• Remind applicants that collaborative engagement (Principle 10) and escalation (Principle 11) are useful tools but highlights that they only need to be undertaken where necessary – i.e. where conducive to achieving their stewardship objectives.

These immediate interim changes to the Code ahead of the conclusion of the wider ongoing review were unexpected. However, we understand that the FRC had received consistent feedback from investors on the reporting burden and identified steps that could be taken immediately to reduce the burden.

What happens next?

The FRC will hold a series of roundtables with stakeholders throughout August and September ahead of launching a public consultation on the Code later this year.