"Unfulfilling Decision" - Financial Regulatory Commission excludes Environmental, Social, and Governance (ESG) factors from their stewardship definition
In the world of UK finance, a significant debate has arisen surrounding the revised Stewardship Code, a set of guidelines designed to ensure responsible investment practices. The revised definition of stewardship, which now emphasises alignment, transparency, and outcomes between engagement and voting actions by investors, has sparked controversy.
The controversy revolves around the code's shift from a prescriptive, activity-based approach to one focusing on broader stewardship priorities set by investors themselves. This flexible approach, while welcomed by some, has raised concerns among industry figures such as Sarah Wilson, CEO of Minerva Analytics, and Oscar Warwick Thompson, head of policy and regulatory affairs at the UK Sustainable Investment and Finance Association (UKSIF).
The revised Code encourages investors to set their own stewardship priorities, such as diversity, equity, and inclusion (DEI), climate change, and net-zero goals, rather than prescribing specific environmental, social, and governance (ESG) factors or actions centrally. This move has sparked debate on how the Code balances traditional corporate governance duties with broader ESG considerations.
The 2024 consultation on the Code emphasises the need for investors to demonstrate how their engagement outcomes influence proxy voting decisions and vice versa. However, practical challenges like data silos, resource constraints, and complex stakeholder interests hinder seamless integration.
The revised Code also moves away from focusing on the quantity of stewardship activities to the quality and alignment of actions. Investors are now expected to show consistent, credible stewardship strategies rather than just reporting on isolated activities.
The effects on the focus on environmental and social factors are unclear. Because the Code allows investors to define their own stewardship priorities, the emphasis on environmental and social factors such as climate change and social justice depends largely on investor commitments. Some investors will prioritise these, while others may not, potentially leading to uneven emphasis across the market.
However, the integration requirement between engagement and voting may enhance the effectiveness of stewardship on environmental and social issues by ensuring that dialogue with companies leads to meaningful voting decisions aligned with ESG goals.
The controversy lies in whether this flexible, outcome-oriented approach sufficiently guarantees robust attention to systemic ESG risks, or whether it risks dilution of stewardship on critical environmental and social matters because of its voluntary, principle-based nature.
Despite the controversy, the new version of the code has been supported by over 300 signatories, including asset managers and owners representing approximately £50 trillion in assets under management. The Church of England Pension Board, a significant player in the industry, has expressed caution about the credibility of the revised code and will engage in discussion with peer UK asset owners before making a judgement.
UKSIF, which had previously campaigned for the code to retain explicit reference to environmental and social factors, believes that more work is needed for policymakers and the industry to maintain the UK's leadership position on stewardship practice and support the transition to a more sustainable future.
The revised code introduces a standalone section addressing the role of service providers, drawing mixed reactions. Critics argue that the revised wording risks sending "mixed signals to some investors," while supporters see it as a step towards acknowledging the increasing relevance of service providers in the stewardship ecosystem.
As the new version of the code enters into effect in January 2026, the debate continues, with industry figures calling for a careful balance between flexibility and robustness in addressing systemic ESG risks.
References: [1] Financial Reporting Council (FRC) (2022). Stewardship Code consultation 2024. Retrieved from https://www.frc.org.uk/our-work/stewardship/stewardship-code-consultation-2024/ [2] Financial Reporting Council (FRC) (2022). Stewardship Code 2020. Retrieved from https://www.frc.org.uk/our-work/stewardship/stewardship-code-2020/ [3] Will Martindale (2022). Effective stewardship in the revised code. Retrieved from https://www.ft.com/content/43338c9f-d99b-416a-b941-470c781c44c4 [4] UK Sustainable Investment and Finance Association (UKSIF) (2022). Response to the FRC's Stewardship Code consultation 2024. Retrieved from https://www.uksif.org/policy-and-research/uksif-responses/uksif-response-to-the-frcs-stewardship-code-consultation-2024/ [5] Sarah Wilson (2022). The FRC's approach to service providers. Retrieved from https://www.minerva-analytics.com/2022/09/the-frcs-approach-to-service-providers/
Investors are now tasked with setting their own stewardship priorities, such as diversity, equity, and inclusion (DEI), climate change, and net-zero goals, which shifts the focus from prescribed environmental, social, and governance (ESG) factors to business-specific objectives. The flexibleness of this approach, while welcomed by some, has raised concerns among industry figures on whether it guarantees robust attention to systemic ESG risks or risks dilution of stewardship on critical environmental and social matters due to its voluntary, principle-based nature.
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