Investors should focus on transparency and evidence in stewardship reporting, says FRC

The revised UK Stewardship Code came into effect on 1 January 2020. It requires signatories to report annually against the Code’s principles and the stewardship activities they are undertaking, with a focus on environmental, social and governance (ESG) factors.

The code acts as a companion to the UK Corporate Governance Code. While the Governance Code sets standards for listed companies, the Stewardship Code says what investors ought to be doing to monitor such companies and to ensure they are complying with those obligations.

The FRC reviewed 21 early reports (63 page / 2.7MB PDF) to identify how well prospective signatories to the Stewardship Code were addressing the higher standards now set.

Although the review revealed good examples and case studies evidencing stewardship activity, the FRC said few reports consistently demonstrated the application of all principles or addressed all the reporting expectations.

According to the review, reporting could improve if investors and asset managers reflected on the effectiveness of their approach, demonstrating continuous improvement and disclosing outcomes. The FRC said statements should be supported with specific evidence from the reporting period, and the rationale rather than just a general statement of approach.

It added reports should address all asset classes and geographies, with explanations where the stewardship approach differs or is not as developed in other asset classes rather than avoiding the question.

Corporate governance expert Tom Proverbs-Garbett of Pinsent Masons, the law firm behind Out-Law, said: “The FRC has emphasised that focus throughout the Code must be on outcomes – what has taken place and what has been the impact of the decisions made?

“With no prescribed approach to reporting, signatories are encouraged to make connections between the principles in order to establish a holistic approach to stewardship. In the FRC’s view, such linkage is a ‘key message’ to emerge from the review,” Proverbs-Garbett said.

Proverbs-Garbett said the FRC noted that reporting on the effective identification and management of risks under principle 4, especially in the current climate, was important.

“This includes contributions to collaborative efforts in a market to identify issues and the consideration of ‘macro’ risks, such as climate change and Covid-19, which will be important for reporting in 2021,” Proverbs-Garbett said.

“The FRC found that better reporting on collaboration (principle 10) tended to address the signatory’s particular role in initiatives. This may or may not reflect a position of leadership – the more important issue is why this activity was undertaken and what was achieved,” Proverbs-Garbett said.

The FRC identified weaknesses in reporting against principle 5 on reviewing policies and assessing effectiveness, and principle 8 on holding managers and service providers to account.

“In both cases the FRC found insufficiently detailed description around how and why action has been taken, and a general reluctance to place such a description in the context of specific areas of business,” Proverbs-Garbett said.

The FRC said the early reporting review would be a key tool to help prospective signatories prepare stewardship reports, and reinforce the UK’s reputation as a centre of excellence in stewardship.