On 24 October 2019, the Financial Reporting Council (the "FRC"), the regulatory body for auditors, accountants and actuaries, published the UK Stewardship Code 2020 (the "Code"). In its press release, the FRC states that the new Code, which takes effect on 1 January 2020, “substantially raises expectations” for how money is invested on behalf of savers and pensioners in the UK.

The new Code, which replaces the version of the Stewardship Code published in 2012, is part of a comprehensive revision to the UK’s corporate governance framework that began with the introduction of the new UK Corporate Governance Code in 2019. The new Code defines stewardship as “the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society”.

Although voluntary, under COBS 2.2.3 FCA-regulated asset managers managing institutional money are required to disclose the nature of their commitment to the Code and where they do not so commit, their alternative investment strategy. There is some overlap with the equivalent disclosure provisions of the Shareholder Rights Directive 2 which apply to EU asset managers.

The new Code has been restructured and now comprises a set of 12 ‘apply and explain’ principles for asset owners and asset managers which are split into four main sections:

(i) purpose and governance;

(ii) investment approach;

(iii) engagement; and

(iv) exercising rights and responsibilities.

In addition, the new Code includes a separate set of six ‘apply and explain’ principles for service providers.

All principles in the new Code are supported by reporting expectations which indicate information that organisations should include in their Stewardship Report. Organisations must determine which reporting expectations are relevant or appropriate to their business or role in the investment community. The new Code contains an additional reporting expectation that asset owners and asset managers disclose the proportion of shares voted in the last year and why.

An organisation applying to become a signatory to the new Code will have to provide a Stewardship Report that sets out how it has applied the principles in the preceding 12 months. When applying the principles, signatories should consider, among other issues:

(i) the effective application of the UK Corporate Governance Code and other governance codes;

(ii) directors’ duties, particularly those matters to which they should have regard under section 172 of the Companies Act 2006;

(iii) capital structure, risk, strategy and performance;

(iv) diversity, remuneration and workforce interests;

(v) audit quality;

(vi) environmental and social issues, including climate change; and

(vii) compliance with covenants and contracts.

For an organisation to be listed as a signatory on the FRC website, the Report, which should be engaging, succinct and in plain English, will need to meet the reporting expectations of the FRC. Further details on how to report are set out in the new Code and on the FRC’s website.

Applicants seeking to be included in the first list of signatories to the new Code must submit their Stewardship Reports to the FRC by 31 March 2021.