Podcast: Private Funds Update: The UK Stewardship Code 2020

November 11, 2019
5:24 minutes

In this Ropes & Gray podcast, asset management partners Melissa Bender and Isabel Dische discuss the recently published revised edition of the UK Stewardship Code. In particular, the revised Code specially requires that UK asset manager signatories explain how their investment policies enable them to practice stewardship and adds related ESG-related reporting obligations.


melissa-benderMelissa Bender: Hello, and thank you for joining us today on this Ropes & Gray podcast, the latest in our series of podcasts and webinars focused on ESG and corporate social responsibility issues. I’m Melissa Bender, a partner in our asset management group based in San Francisco.  Joining me today is Isabel Dische, a partner in our asset management group in New York.  Today, we will be discussing the recently published revised edition of the UK Stewardship Code and how it may affect UK asset managers. One note before we get started: today’s podcast is intended to be an overview of certain considerations related to the UK Stewardship Code and is only designed to provide a high-level overview of some key considerations. Additionally, the podcast should not be taken as advice on the merits of ESG or impact investing or a recommendation related to the integration of these factors. Before we launch into the latest developments, Isabel, can you give us some background on the UK Stewardship Code?

isabel-discheIsabel Dische: Definitely, I’m glad to be here. So the UK Stewardship Code was first published in 2010 by an institution called the Financial Reporting Council, commonly referred to as the FRC. It was prompted by the 2008 financial crisis as there was a general feeling that regulation of institutional investors needed to be reevaluated. The goal was to promote active share ownership and corporate governance of UK listed companies. Now, that was almost 10 years ago and, as novel and advanced as the Code was back in the day, it had lately received a lot of criticism. Last year, the government carried out a review which recommended that the FRC be replaced with a more powerful watchdog. In response, the FRC published a revised edition, which attracted significant attention because it specifically mentions that UK asset managers who’ve signed up to the Code must consider environmental, social and governance factors.

Melissa Bender: I understand that the updates to the Code were also prompted by the sense that asset managers were, in many cases, simply ‘paying lip service’ to environmental, social and governance issues.

Isabel Dische: Yes, that’s right. And in response to that criticism, the revised Code requires a much more detailed, yearly submission to the FRC, and for the first time, it requires its signatories to not only set out what steps asset managers took to engage with the assets they’re invested in, but also the outcomes. The Code consists of 12 Principles for asset managers and asset owners, and six Principles for service providers. These are each supported by reporting expectations, which indicate the information that should be publicly reported in order to become a signatory. For example, asset managers and pension funds will have to disclose their shareholders’ voting records on environmental, social and governance issues. Fundamentally, the FRC’s position is not to prescribe a single approach to effective stewardship, but to allow organizations to meet the expectations in a manner that is aligned with their own business models and strategies. Some reporting expectations will be more relevant for asset managers than asset owners or those using intermediaries, for example. It is therefore for each organization to determine which reporting expectations are relevant and appropriate to their business.

Melissa Bender: It’s worth noting that the updated Code may facilitate greater alignment between the asset owners and asset managers around ESG issues. The Code used to target asset managers only. The new Code will apply to advisers of asset managers, pension funds, insurers, private equity, fixed income, infrastructure, and investments outside Britain, so it overall captures a much larger portion of the investment community. The FRC will also review its existing list of signatories and decide if these firms can remain signatories. The FRC will then publish the names of firms that meet the standards, which make the firms more accountable in respect of their compliance. Isabel, perhaps you talk a bit how the process of becoming a signatory has changed.

Isabel Dische: Certainly. So the existing Code simply asks funds to outline their investment policies. Organizations wishing to become signatories of the new Code will be required to explain their purpose, investment beliefs, strategy and culture, and how these enable them to practice stewardship. They are also expected to show how they are demonstrating this commitment through appropriate governance, resourcing and staff incentives. They will have to demonstrate they’ve taken appropriate action in the prior 12 months by publishing their full shareholder voting records. They also will have to explain their reasoning behind those voting decisions and set out how they are responding to systemic risks, such as the climate emergency. The FRC then evaluates reports, and those that meet the reporting expectations will be listed as signatories to the Code. Melissa, do you want to speak about when the updated Code will take effect?

Melissa Bender: Sure. The Code takes effect from January 1, 2020 and to be included in the first list of signatories, organizations must submit a final report to the FRC by March 31, 2021. Signatories’ actions in 2020 will be due for disclosure in 2021. We shall see the effectiveness of the new Code in the coming years, and perhaps I should note here that it is voluntary. However, if asset managers choose not to follow the Code, the Financial Conduct Authority will require them to provide additional explanations. This will likely result in companies being incentivized to apply the Code anyway.

Isabel Dische: Great. Thank you, Melissa, for joining me today for this discussion. And thank you to all of our listeners. For more information on the topics we’ve discussed today, or other topics of interest to the ESG and impact investing community, please visit our website at www.ropesgray.com. And of course, if we can help you to navigate any of these areas, please don’t hesitate to contact us. You can also subscribe and listen to this series wherever you regularly listen to podcasts, including on Apple, Google and Spotify. Thanks again for listening.