Laith Cahill
Senior Net Zero Stewardship Specialist
The Financial Reporting Council (FRC) announced a set of interim changes to its Stewardship Code last month and highlighted key themes for further revisions ahead of a full public consultation.
When the FRC announced its public consultation on revisions to the Stewardship Code in February, investors welcomed the opportunity to feedback on this important driver of the UK’s stewardship and engagement ecosystem. Since its last update in 2019, the landscape for stewardship and reporting has evolved drastically. Investor needs have changed, as have regulatory obligations.
The Stewardship Code plays a key role in influencing global practice and rigour. Two-fifths of signatories are head-quartered outside the UK, giving it the international profile to set high standards for stewardship and work as a benchmark for other codes.
The proposed consultation presents investors with a chance to call for a balance between streamlined reporting, and ambitions for the transparency and information flow which is integral to investors’ net zero stewardship efforts, including through ‘collaborative engagement’ and ‘escalation’.
Immediate changes proposed are geared towards streamlining reporting requirements and increasing coherency by:
- Removing annual disclosures for ‘Context’ reporting expectations, except for new reports or material changes.
- Removing annual disclosures for ‘Activity’ and ‘Outcome’ reporting expectations for Principles 1, 2, 5 and 6.
- Explicitly allowing use of content from previous reporting and cross-referencing across previous Stewardship Code reports.
- Setting clear expectations of what is considered an ‘outcome’.
- Allowing reporting against Principles 10: Collaborative engagement, and 11: Escalation ‘where necessary’.
These changes - outlined here and accompanied by a set of FAQs - will apply for the next reporting window which closes 31 October 2024.
The right level of reporting
Investors have long made clear that while stewardship reporting provides much needed transparency and accountability, it should not take too much time away from the actual work of stewardship itself. The FRC has made quick progress on this with these changes.
The removal of annual disclosure requirements for ‘context’ reporting expectations, as well as for ‘activities’ and ‘outcomes’ under Principles 1, 2, 5 and 6, broadly represent a sensible and proportional first step to reducing reporting. The changes acknowledge that purpose, investment beliefs, governance and other key elements from these principles may not change substantially from year to year.
Taken alongside the move to allow cross-referencing from previous reports, these changes should help to consolidate existing reporting obligations without sacrificing ambition. It is worth noting that this streamlining should also offer benefits to asset owners, who will have access to a more digestible volume of reporting material.
"These measures and clarifications do not reduce the requirement for high quality disclosures but allow for more proportionate reporting."
- FRC, Interim Changes to Reporting for Stewardship Code Signatories
In addition, the clarification on how ‘outcomes’ are defined provides a more expansive understanding of the term, recognising the different forms that outcomes can take. Climate engagements, for example, are often the result of relationship building and long-term dialogue, with outcomes materialising over a multi-year basis. The new definition also provides the space for investors to articulate how engagements have shaped their own stewardship approach or even investment thesis, or describe milestones achieved by companies on the journey to more substantial outcomes.
These are all beneficial results. While only a small change, this will hopefully reward more reflective approaches to engagements, their outcomes and related reporting.
Outstanding questions
While these changes represent positive steps forward ahead of a public consultation, more clarity is required in other areas.
First and foremost, how will the revised Stewardship Code treat collaborative engagement and escalation? These are both critical elements in investors’ stewardship toolkits. Work done by Climate Action 100+ and more recently the Net Zero Engagement initiative, for instance, has played a part in promoting disclosures and action on climate change from some of the world’s largest corporate greenhouse gas emitters.
The FRC changes stipulate that collaborative engagement and escalation need only be reported on “where necessary”. This risks framing both as tools of last resort.
Many investors engage in collaborative initiatives or use escalation techniques as part of the day-to-day work of stewardship. From our perspective, collaboration is invaluable in its ability to facilitate transparency between investor and company.
The clarification recognises the fact that not all investors will join collaborative engagements or escalate each year. A more nuanced revision, however, would better reflect realistic stewardship practices; encourage investors to contextualise their approach; and align with the FRC’s own belief that “collaborative engagement and escalation are important stewardship tools”.
A second question is whether the explicit permission to cross-reference across Stewardship Code reports will be extended. To be truly game changing, cross-referencing would extend to other reporting requirements, such as the Taskforce for Climate-related Financial Disclosures (TCFD) and UK Sustainable Disclosure Regulation, increasing interoperability between the plethora of sustainability reporting requirements facing investors. This would fit well with FRC’s stated commitment to consider its ‘positioning’ alongside other regulators and standard setters.
What’s next?
The FRC has highlighted a period of “focussed engagement with stakeholders” to be undertaken through August and September, followed by the awaited public consultation.
We will continue our dialogue with the FRC and pen a formal response, informed by our Stewardship working group, to the public consultation once live. Alongside questions raised by the public consultation, work will continue to build answers to three central questions:
- How can the Code be enhanced to meet the challenges of the net zero transition and drive decarbonisation?
- How can the Code account more explicitly for system- or macro-level stewardship?
- How can lessons from the UK Code be integrated into an improved EU regulatory landscape for stewardship?
A core part of our work is supporting members’ stewardship and engagement practices. This includes advocating for a supportive policy and regulatory environment that creates the right conditions and provides the incentives needed to accelerate progress on the transition to net zero.
If you would like to consider these questions in more detail and shape the stewardship landscape, we encourage you to join our working group. We are also encouraging members to respond individually to the consultation and can provide support there too.
If you’d like to take part in our working groups to help shape future resources, why not get in touch today to learn more about becoming a part of IIGCC?