FRC: The influence of the UK Stewardship Code 2020 on practice and reporting – Research study
On July 5, 2022 the Financial Reporting Council (FRC) published the results of independent research it commissioned so that it can begin to assess the impact of the 2020 Stewardship Code on stewardship practices.
The research included a survey with asset managers and interviews with asset managers and asset owners (who had applied to become signatories to the Stewardship Code and were awaiting the outcome of their application) conducted between May and September 2021. Key findings from the research include the following:
- Changes in practice: Overall, the research found that asset managers and asset owners are positive about the impact of the Stewardship Code. There was strong evidence of material changes of practice following the revision of the Stewardship Code in 2020, notably in the areas of governance and resourcing of stewardship, stewardship activities, processes and outcomes, and monitoring and reporting of stewardship.
- Resourcing: The Stewardship Code requires signatories to appropriately resource stewardship. Both asset owners and asset managers reported increases in the resourcing of stewardship, mostly dedicated to the growth of stewardship teams and use of external experts, and participants in both the survey and interviews were largely positive about the future, expecting growth in areas of staffing and research budgets.
- Governance: The Stewardship Code requires that signatories’ structures and processes enable oversight and accountability for effective stewardship. All the organisations in the sample identified some form of organisational restructuring to better integrate stewardship within their investment decision-making, a new requirement of the Stewardship Code. Large asset managers tended to have separate environmental, social and governance (ESG) and stewardship teams, which worked more closely with specialist investment teams, while the investment team of small asset managers tended to have stewardship responsibilities.
- Engagement, collaboration and escalation: The Stewardship Code requires signatories to engage with issuers, collaborate with others to influence issuers, and escalate their engagement to seek change. All respondents had undertaken some form of engagement and escalation with companies and most identified collaborative engagement (working with other investors) as an increasingly important escalation tool. ESG issues such as climate, governance, diversity, and biodiversity are noted as being increasingly prominent themes for investors.
- Governance: The Stewardship Code requires signatories to annually report on their application of the Stewardship Code. The most notable benefit of the revised Stewardship Code has been the emphasis on reporting the activities and outcomes of stewardship, which interviewees believe has prompted a major change in behaviour. This has encouraged investors to be more reflective about their stewardship practices and give more consideration to improvements to their approach. Asset owners are now looking beyond policies and increasingly require their managers to robustly demonstrate their stewardship activities and achievements.
- Credibility of the Stewardship Code: The research identified a strong and positive perception of the Stewardship Code as a significant and credible framework. Both UK and non-UK respondents considered the Stewardship Code (both the 2012 and 2020 versions) to be the gold standard for stewardship across the world. Key motivating factors for respondents applying to become signatories included increased market expectations, for example from asset owners and investment consultants, to demonstrating good practice and avoiding reputational risk. However, asset managers and asset owners both called for a more joined-up approach across different stewardship and ESG reporting initiatives.
Next steps
The FRC notes that the Government confirmed, in its response to the consultation, Restoring trust in audit and corporate governance, that the FRC, working with the Financial Conduct Authority, the Department for Work and Pensions, and the Pensions Regulator, will review the regulatory framework for effective stewardship, including the operation of the Stewardship Code, from 2023. This research is the first step in assessing whether the Stewardship Code is creating a market for effective stewardship and the need for any further regulation in this area.
Later in 2022, the FRC will engage asset owners and investment consultants to understand how they use asset managers’ stewardship reporting for decision making and monitoring.
(FRC, The influence of the UK Stewardship Code 2020 on practice and reporting – Research study, 05.07.2022)
BEIS: The Statutory Auditors and Third Country Auditors (Amendment) Regulations 2022 No. 762
On July 6, 2022 the Statutory Auditors and Third Country Auditors (Amendment) Regulations 2022 No. 762 (2022 Regulations) were laid before Parliament and come into force on July 27, 2022. They make amendments to the UK’s audit regime by amending the Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019 ( 2019 Regulations).
The 2019 Regulations made amendments to the framework for registration and regulation of third country auditors, which have applied from the end of the EU exit transition period. They provided new powers for the Secretary of State to grant equivalence of third countries' audit regulatory regimes (see section 1240A Companies Act 2006). The list of third countries granted equivalence status was included in Schedule 1 to the 2019 Regulations and it includes some countries granted time limited ‘provisional’ or ‘transitional’ equivalence. When a country’s status changes, it is added to one of the lists, or removed, or the date of its expiry is amended or removed, by amendment under section 1240A.
Among other things, the 2022 Regulations:
- Include changes to the 2019 Regulations to make indefinite the approval of the United States of America as a fully equivalent third country, and the approval of its audit regulatory authorities (the US Public Company Accounting Oversight Board (PCAOB) and the US Securities and Exchange Commission (SEC)) as “approved third country competent authorities”. These changes will come into effect in advance of July 31, 2022 when the current time-limited periods of the United States’ approval for provisional equivalence, and of its authorities’ approvals for provisional adequacy, would otherwise expire.
- Include amendments to Schedules 1 and 2 of the 2019 Regulations (to remedy a technical problem in the 2019 Regulations) to make clear that the UK’s approvals of the equivalence of third countries, where they are granted afresh under the power in section 1240A Companies Act 2006 by the 2022 Regulations, cause them to fall within the definition of an “equivalent third country”; and that its approvals of the adequacy of third country competent authorities, where they are granted afresh under the power in section 1240B Companies Act 2006 by the 2022 Regulations, cause them to fall within the definition of an “approved third country competent authority”.
(BEIS, The Statutory Auditors and Third Country Auditors (Amendment) Regulations 2022 No. 762, 06.07.2022)
(BEIS, The Statutory Auditors and Third Country Auditors (Amendment) Regulations 2022 No. 762 – Explanatory Memorandum, 06.07.2022)
