iStock_000016153672_Large_graph-1536x1024

The proposals seek to address engagement feedback which called for a more effective stewardship model that would support UK competitiveness and growth.

By Mark Austin, Chris Horton, James Inness, Anna Ngo, and Johannes Poon

On 11 November 2024, the Financial Reporting Council (FRC) launched its consultation on proposed revisions to its Stewardship Code (the Code). The Code applies on a voluntary basis to its signatories which comprise asset owners, asset managers, proxy advisors, and investment consultants. The Code’s principles are adhered to on an “apply and explain” basis.

The FRC intends the revised Code to continue to drive effective stewardship by supporting high-quality disclosures, appropriately reflect developing stewardship practice, and maintain its global standing. The regulator is also focused on the revisions helping to drive UK competitiveness and growth, further to the remit letter that it received from the UK government in November 2023.

Summary of Proposals

The proposed changes include:

  • Narrowing the definition of stewardship to support better and more transparent conversations between participants in the investment chain about their investment beliefs and objectives, and how their stewardship supports these. The proposed definition focuses on “long-term sustainable value creation”, which will encompass a range of relevant factors.
  • Streamlining the Code’s principles with more concise reporting prompts to help concentrate reporting on the most insightful areas, while also reducing the volume of reporting.
  • Tailoring the Service Provider Principles to include, for the first time, principles that are dedicated to proxy advisors and investment consultants:
    • Signatories to communicate with clients to understand their objectives and deliver services to support their stewardship (applicable to both proxy advisors and investment consultants)
    • Proxy advisors to ensure the quality and accuracy of their research, recommendations, and voting implementation (applicable to proxy advisors only)
    • Investment consultants to integrate stewardship considerations in their advice to clients (applicable to investment consultants only)
    • Investment consultants to identify and respond to market-wide and systemic risks to support clients’ stewardship (applicable to investment consultants only)
  • For the first time, issuing guidance to support signatories in demonstrating how they have implemented stewardship throughout the year.
  • Introducing policy and context disclosures (covering information about the signatory’s organisation, its governance, and resourcing), which would be reviewed less frequently by the FRC (every three years) and updated only as necessary by the signatory.
  • Testing whether the updated Code could better enable signatories to use cross-referencing to publicly available external information they publish to meet other requirements or frameworks to support their reporting against the Code.

Next Steps

This formal consultation follows extensive stakeholder engagement by the FRC this year and the FRC’s updates to certain reporting requirements under the Code in July 2024.

The consultation closes on 19 February 2025. The FRC expects to publish the updated Code in the first half of 2025, with an effective date of 1 January 2026. The first reports to the updated Code would be submitted to the FRC in 2026.

Latham & Watkins will continue to monitor developments in this area.