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FRC review of 2020 UK Stewardship Code reporting


Following the publication of its 2020 Stewardship Code (which took effect from 1 January 2020), at the end of September the FRC released its review of the early reporting which has taken place under the new Code. While the FRC notes that some firms have made 'good attempts' at early reporting, it says there is more to be done to ensure that investors meet the high standard of reporting on stewardship activities undertaken and outcomes achieved, rather than just stating intent or policy.

The review provides detailed feedback on the quality of reporting from a wide range of asset managers and owners against each of the 12 Principles of the new Code. The review also includes examples of high quality and best-in-class disclosures from the early reporting to illustrate what the FRC expects from organisations and to provide clear guidance to those who must report next year. The key points made in the review are as follows.

1. Address all Principles and reporting expectations

Few of the reports reviewed addressed all 12 Principles and the three reporting expectations of context, activity and outcome. The most overlooked areas are Principle 3 (Conflicts of interest), Principle 5 (Review and assurance) and Principle 8 (Monitoring managers and service providers). The FRC notes that organisations must explain where a reporting expectation doesn't apply rather than ignoring the disclosure.


2. Structure

The reports reviewed (21 in total) varied greatly in structure and length. The FRC takes a relaxed approach to this and is happy for each organisation to structure its report as it thinks best, provided that the product is as useful and accessible as possible. It is recommended, however, that reports are in plain English, with connections across different parts of the report clearly signposted and a glossary and defined terms used where appropriate.


3. "fair, balanced and understandable"

Reports should include both positive and negative aspects of the stewardship undertaken to provide a balanced overview. The FRC wants to see disclosures describing set-backs and lessons learned over the reporting period so it is clear how the processes are being modified and improved. Further, it considers that the most effective reports are those which include specific data, examples and case studies to give a detailed explanation of the approach taken (rather than a general, high-level overview) and cover all asset classes and geographies. It acknowledges that stewardship practices in asset classes outside of UK listed equity are still being developed by some organisations but encourages them to disclose how processes are being modified and how they differ across asset classes.


4. Covid-19 and Climate Risk

The FRC clearly states the importance of good stewardship in the context of a global crisis such as Covid-19 and the expectation that organisations will address the risks posed by Covid-19 and also climate change, particularly in relation to Principle 4 (Promoting well-functioning markets). It is noted that Covid-19 has emphasised the importance of "S" in ESG and the FRC believes that investor stewardship can be a positive catalyst for change in that area.


5. Communication

In the context of Principle 6 (Client and beneficiary needs), the FRC describes communication as key. There are two limbs to this: (1) communication in seeking the views of clients and beneficiaries and (2) informing those parties of the organisation's stewardship and investment activities as well as the outcomes of those actions. In reporting on this, organisations need to explain the actions taken in response to the views sought and reflect on the methods used.


6. Escalation

Principle 11 requires organisations to escalate stewardship activities where necessary to influence issuers. The reports reviewed took a very general approach to escalation and the FRC would like to see more specific evidence of how escalation differs for geographies, funds and assets and further disclosure on the outcomes of the escalation processes, giving consideration to whether the objectives of the engagement have been met and if not, acknowledging that and explaining the next steps.

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