Stewardship Code - Dec 19 Final PDF
Stewardship Code - Dec 19 Final PDF
Stewardship Code - Dec 19 Final PDF
THE UK
STEWARDSHIP
CODE
2020
PRINCIPLES AT A GLANCE
Investment approach
Engagement
9. Engagement
10. Collaboration
11. Escalation
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2020 UK Stewardship
on Board Effectiveness
Code 2018
CONTENTS
INTRODUCTION 4
HOW TO REPORT
5
Engagement 17
ANNEX 30
UK Regulatory Requirements 30
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2020 UK Stewardship
on Board Effectiveness
Code 2018
HOW TO REPORT
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2020 UK Stewardship
on Board Effectiveness
Code 2018
PRINCIPLES FOR ASSET OWNERS
AND ASSET MANAGERS
Principle 1
Signatories’ purpose, investment beliefs, strategy,
and culture enable stewardship that creates long-
term value for clients and beneficiaries leading
to sustainable benefits for the economy, the
environment and society.
REPORTING EXPECTATIONS
Context
Signatories should explain:
• the purpose of the organisation and an outline of its culture, values,
business model and strategy; and
• their investment beliefs, i.e. what factors they consider important for
desired investment outcomes and why.
Activity
Signatories should explain what actions they have taken to ensure their
investment beliefs, strategy and culture enable effective stewardship.
Outcome
Signatories should disclose:
• how their purpose and investment beliefs have guided their
stewardship, investment strategy and decision-making; and
• an assessment of how effective they have been in serving the best
interests of clients and beneficiaries.
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PRINCIPLES FOR ASSET OWNERS AND ASSET MANAGERS
Principle 2
Signatories’ governance, resources and incentives
support stewardship.
REPORTING EXPECTATIONS
Activity
Signatories should explain how:
• their governance structures and processes have enabled oversight
and accountability for effective stewardship within their organisation
and the rationale for their chosen approach;
• they have appropriately resourced stewardship activities, including:
- their chosen organisational and workforce structures;
- their seniority, experience, qualifications, training and diversity;
- their investment in systems, processes, research and analysis;
- the extent to which service providers were used and the services
they provided; and
• performance management or reward programmes have incentivised
the workforce to integrate stewardship and investment decision-
making.
Outcome
Signatories should disclose:
• how effective their chosen governance structures and processes
have been in supporting stewardship; and
• how they may be improved.
Principle 3
Signatories manage conflicts of interest to put the
best interests of clients and beneficiaries first.
REPORTING EXPECTATIONS
Context
Signatories should disclose their conflicts policy and how this has been
applied to stewardship.
Activity
Signatories should explain how they have identified and managed any
instances of actual or potential conflicts related to stewardship.
Outcome
Signatories should disclose examples of how they have addressed
actual or potential conflicts.
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PRINCIPLES FOR ASSET OWNERS AND ASSET MANAGERS
Principle 4
Signatories identify and respond to market-wide and
systemic risks to promote a well-functioning financial
system.
REPORTING EXPECTATIONS
Activity
Signatories should explain:
• how they have identified and responded to market-wide and
systemic risk(s), as appropriate;
• how they have worked with other stakeholders to promote
continued improvement of the functioning of financial markets;
• the role they played in any relevant industry initiatives in which they
have participated, the extent of their contribution and an assessment
of their effectiveness, with examples; and
• how they have aligned their investments accordingly.
Outcome
Signatories should disclose an assessment of their effectiveness in
identifying and responding to market-wide and systemic risks and
promoting well-functioning financial markets.
Market-wide risks are those that lead to financial loss or affect overall
performance of the entire market and include but are not limited to:
• changes in interest rates;
• geopolitical issues; and
• currency rates.
Systemic risks are those that may lead to the collapse of an industry,
financial market or economy and include but are not limited to:
• climate change; and
• the failure of a business or group of businesses.
Stakeholders may include investors, issuers, service providers,
policymakers, audit firms, not-for-profits, regulators, associations
and academics.
Principle 5
Signatories review their policies, assure their
processes and assess the effectiveness of their
activities.
REPORTING EXPECTATIONS
Activity
Signatories should explain:
• how they have reviewed their policies to ensure they enable effective
stewardship;
• what internal or external assurance they have received in relation to
stewardship (undertaken directly or on their behalf) and the rationale
for their chosen approach; and
• how they have ensured their stewardship reporting is fair, balanced
and understandable.
Outcome
Signatories should explain how their review and assurance has led to
the continuous improvement of stewardship policies and processes.
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PRINCIPLES FOR ASSET OWNERS AND ASSET MANAGERS
INVESTMENT APPROACH
Principle 6
Signatories take account of client and beneficiary
needs and communicate the activities and outcomes
of their stewardship and investment to them.
REPORTING EXPECTATIONS
Context
Signatories should disclose:
• the approximate breakdown of:
- the scheme(s) structure, for example, whether the scheme is
a master trust, occupational pension fund, defined benefit or
defined contribution, etc;
Outcome
Signatories should explain:
• how they have evaluated the effectiveness of their chosen methods
to understand the needs of clients and/or beneficiaries;
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PRINCIPLES FOR ASSET OWNERS AND ASSET MANAGERS
INVESTMENT APPROACH
Principle 7
Signatories systematically integrate stewardship and
investment, including material environmental, social
and governance issues, and climate change, to fulfil
their responsibilities.
REPORTING EXPECTATIONS
Context
Signatories should disclose the issues they have prioritised for
assessing investments, prior to holding, monitoring through holding
and exiting. This should include the ESG issues of importance to them.
Activity
Signatories should explain:
• how integration of stewardship and investment has differed for
funds, asset classes and geographies;
• how they have ensured:
- tenders have included a requirement to integrate stewardship and
investment, including material ESG issues; and
- the design and award of mandates include requirements to
integrate stewardship and investment to align with the investment
time horizons of clients and beneficiaries;
OR
• the processes they have used to:
- integrate stewardship and investment, including material ESG
issues, to align with the investment time horizons of clients and/or
beneficiaries; and
- ensure service providers have received clear and actionable
criteria to support integration of stewardship and investment,
including material ESG issues.
Outcome
Signatories should explain how information gathered through
stewardship has informed acquisition, monitoring and exit decisions,
either directly or on their behalf, and with reference to how they have
best served clients and/or beneficiaries.
INVESTMENT APPROACH
Principle 8
Signatories monitor and hold to account managers
and/or service providers.
REPORTING EXPECTATIONS
Activity
Signatories should explain how they have monitored service providers
to ensure services have been delivered to meet their needs.
Outcome
Signatories should explain:
• how the services have been delivered to meet their needs;
OR
• the action they have taken where signatories’ expectations of their
managers and/or service providers have not been met.
For example:
• asset owners monitoring asset managers and investment
consultants to ensure that assets have been managed in
alignment with their investment and stewardship strategy and
policies; or
• asset managers monitoring proxy advisors to ensure, as far as
can reasonably be achieved, that voting has been executed
according with the manager’s policies; and
• asset managers monitoring data and research providers to
ensure the quality and accuracy of their products and services.
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PRINCIPLES FOR ASSET OWNERS AND ASSET MANAGERS
ENGAGEMENT
Principle 9
Signatories engage with issuers to maintain or
enhance the value of assets.
REPORTING EXPECTATIONS
Activity
Signatories should explain:
• the expectations they have set for others that engage on their behalf
and how;
OR
• how they have selected and prioritised engagement (for example,
key issues and/or size of holding);
For example:
• how engagement has been used to monitor the company;
• any action or change(s) made by the issuer(s);
• how outcomes of engagement have informed investment
decisions (buy, sell, hold); and
• how outcomes of engagement have informed escalation.
Examples should be balanced and include instances where the
desired outcome has not been achieved or is yet to be achieved.
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PRINCIPLES FOR ASSET OWNERS AND ASSET MANAGERS
ENGAGEMENT
Principle 10
Signatories, where necessary, participate in
collaborative engagement to influence issuers.
REPORTING EXPECTATIONS
Activity
Signatories should disclose what collaborative engagement they have
participated in and why, including those undertaken directly or by
others on their behalf.
For example:
• collaborating with other investors to engage an issuer to achieve
a specific change; or
• working as part of a coalition of wider stakeholders to engage on
a thematic issue.
Signatories should provide examples, including
• the issue(s) covered;
• the method or forum;
• their role and contribution.
Outcome
Signatories should describe the outcomes of collaborative
engagement.
For example:
• any action or change(s) made by the issuer(s);
• how outcomes of engagement have informed investment
decisions (buy, sell, hold); and
• whether their stated objectives have been met.
Examples should be balanced and include instances where the
desired outcome has not been achieved or is yet to be achieved.
ENGAGEMENT
Principle 11
Signatories, where necessary, escalate stewardship
activities to influence issuers.
REPORTING EXPECTATIONS
Activity
Signatories should explain:
• the expectations they have set for asset managers that escalate
stewardship activities on their behalf;
OR
• how they have selected and prioritised issues, and developed well-
informed objectives for escalation;
Outcome
Signatories should describe the outcomes of escalation either
undertaken directly or by others on their behalf.
For example:
• any action or change(s) made by the issuer(s);
• how outcomes of escalation have informed investment decisions
(buy, sell, hold);
• whether their stated objectives have been met; and
• any changes in engagement approach.
Examples should be balanced and include instances where the
desired outcome has not been achieved or is yet to be achieved.
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PRINCIPLES FOR ASSET OWNERS AND ASSET MANAGERS
EXERCISING RIGHTS
AND RESPONSIBILITIES
Principle 12
Signatories actively exercise their rights and
responsibilities.
REPORTING EXPECTATIONS
Reporting expectations for listed equity and fixed income investments
are below. In addition, signatories should report on how they have
exercised their rights and responsibilities across other asset classes
they are invested in, where they have the ability to do so, as disclosed
in their reporting against Principle 6.
Context
Signatories should:
• state the expectations they have set for asset managers that
exercise rights and responsibilities on their behalf;
OR
• explain how they exercise their rights and responsibilities, and how
their approach has differed for funds, assets or geographies.
Outcome
For listed equity assets, signatories should provide examples of the
outcomes of resolutions they have voted on over the past 12 months.
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PRINCIPLES FOR
SERVICE PROVIDERS
Principle 1
Signatories’ purpose, strategy and culture enable
them to promote effective stewardship.
REPORTING EXPECTATIONS
Context
Signatories should explain the purpose of the organisation, what
services it offers, and an outline of its culture, values, business model
and strategy.
Activity
Signatories should explain what actions they have taken to ensure their
strategy and culture enable them to promote effective stewardship.
Outcome
Signatories should disclose an assessment of how effective they have
been in serving the best interests of clients.
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PRINCIPLES FOR SERVICE PROVIDERS
Principle 2
Signatories’ governance, workforce, resources
and incentives enable them to promote effective
stewardship.
REPORTING EXPECTATIONS
Activity
Signatories should explain how:
• their governance structures and processes have enabled oversight
and accountability for promoting effective stewardship and the
rationale for their chosen approach;
• the quality and accuracy of their services have promoted effective
stewardship;
• they have appropriately resourced stewardship, including:
- their chosen organisational and workforce structure(s);
- their seniority, experience, qualification(s), training and diversity;
- their investment in systems, processes, research and analysis*;
and
- how the workforce is incentivised appropriately to deliver services;
• they have ensured that fees are appropriate for the services
provided.
Outcome
Signatories should disclose:
• how effective their chosen governance structures and processes
have been in supporting their clients stewardship; and
• how they may be improved.
Principle 3
Signatories identify and manage conflicts of interest
and put the best interests of clients first.
REPORTING EXPECTATIONS
Context
Signatories should disclose their conflicts policy, which seeks to put
the interests of clients first and minimises or avoids conflicts of interest
when client interests diverge from each other.
Activity
Signatories should explain how they have identified and managed any
instances in which conflicts have arisen as a result of client interests.
Outcome
Signatories should disclose examples of how they have addressed
actual or potential conflicts.
Conflicts of interest may arise from, but are not limited to:
• ownership structure;
• business relationships;
• cross-directorships; and
• client interests diverging from each other.
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PRINCIPLES FOR SERVICE PROVIDERS
Principle 4
Signatories identify and respond to market-wide and
systemic risks to promote a well-functioning financial
system.
REPORTING EXPECTATIONS
Activity
Signatories should explain:
• how they have identified and responded to market-wide and
systemic risk(s) as appropriate;
• how they have worked with other stakeholders to promote
continued improvement of the functioning of financial markets; and
• the role they played in any relevant industry initiatives they have
participated in.
Outcome
Signatories should disclose the extent of their contribution and an
assessment of their effectiveness in identifying and responding to
systemic risks and promoting well-functioning financial markets.
Market-wide risks are those that lead to financial loss or affect overall
performance of the entire market and include but are not limited to:
• changes in interest rates;
• geopolitical issues; and
• currency rates.
Systemic risks are those that may cause the collapse of an
industry, financial market or economy, such as climate change.
Stakeholders may include investors, issuers, service providers,
policymakers, audit firms, not-for-profits, regulators, associations
and academics.
Principle 5
Signatories support clients’ integration of
stewardship and investment, taking into account,
material environmental, social and governance
issues, and communicating what activities they have
undertaken.
REPORTING EXPECTATIONS
Context
Signatories should disclose client base breakdown, for example,
institutional versus retail, and geographic distribution.
Activity
Signatories should explain:
• how their services best support clients’ stewardship as appropriate
to the nature of service providers’ business;
• whether they have sought clients’ views and feedback and the
rationale for their chosen approach; and
• the methods and frequency of communication with clients.
Outcome
Signatories should explain:
• how they have taken account of clients’ views and feedback in the
provision of their services; and
• the effectiveness of their chosen methods for communicating with
clients and understanding their needs, and how they evaluated their
effectiveness.
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PRINCIPLES FOR SERVICE PROVIDERS
Principle 6
Signatories review their policies and assure their
processes.
REPORTING EXPECTATIONS
Activity
Signatories should explain:
• how they have reviewed their policies and activities to ensure they
support clients’ effective stewardship;
• what internal or external assurance they have received in relation to
activities that support their clients’ stewardship (undertaken directly
or on their behalf) and the rationale for their chosen approach; and
• how they have ensured their stewardship reporting is fair, balanced
and understandable.
Outcome
Signatories should explain how the feedback from their review
and assurance has led to continuous improvement of stewardship
practices.
UK regulatory requirements
The Code is voluntary and sets a standard that is
higher than the minimum UK regulatory requirements.
Signatories may choose to use their Report to meet
the requirements of the Code and disclose information
to meet other stewardship-related UK regulatory
requirements or international stewardship codes.
However, the FRC cannot provide assurance against all
other requirements in assessing reporting against the
Code.
1
The Department for Work and
Pensions (DWP) issues regulations
for occupational pension funds and
the Ministry of Housing, Communities
and Local Government (MHCLG)
issues regulations for local government
pension schemes. See table in Annex.
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Asset managers
Asset managers are required under the FCA Conduct of Business
Sourcebook (COBS) to develop and explain how they have
implemented an engagement policy for their listed equity investments,
including how they monitor investee companies, their voting behaviour
and their use of proxy advisors.
Firms are required under the FCA COBS to disclose the nature of their
commitment to the Code or, where they do not commit to the Code,
their alternative investment strategy (COBS Rule 2.2.3).
Proxy advisors
Proxy advisors are required under the Proxy Advisors (Shareholders’
Rights) Regulations 2019 (PA Regulations), supervised by the FCA,
to publicly disclose a code of conduct and explain how they have
followed it. Proxy advisors may wish to use the Principles for Service
Providers as their code of conduct.
They are also required to disclose and implement a conflicts of interest
policy and give assurance about the accuracy and reliability of their
advice.
Great Britain
• The Occupational Pension Schemes (Investment) Regulations 2005
• The Occupational and Personal Pension Schemes (Disclosure of
Information) Regulations 2013
As amended by:
• The Pension Protection Fund (Pensionable Service) and Occupational
Pension Schemes (Investment and Disclosure) (Amendment and
Modification) Regulations 2018
• The Occupational Pension Schemes (Investment and Disclosure)
(Amendment) Regulations 2019
Asset owners
– trustees of
occupational Northern Ireland
pension
schemes • The Occupational Pension Schemes (Investment) Regulations (Northern The
Ireland) 2005 Pensions
Regulator
• The Occupational and Personal Pension Schemes (Disclosure of
Information) Regulations (Northern Ireland) 2014
As amended by:
• The Pension Protection Fund (Pensionable Service) and Occupational
Pension Schemes (Investment and Disclosure) (Amendment and
Modification) Regulations (Northern Ireland) 2018
• The Occupational Pension Schemes (Investment and Disclosure)
(Amendment) Regulations (Northern Ireland) 2019
Asset
owners – • Senior Management Arrangements, Systems and Controls (SYSC)
insurers and sourcebook 3.4 SRD Requirements
reinsurers
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Financial Reporting Council
www.frc.org.uk