Clifford Chance

The UK Stewardship Code 2020 is a complete revamp of the 2012 Code, creating tailored requirements for asset owners such as insurers. It sets high expectations for insurers' investment management arms in terms of governance, oversight and reporting. The code creates a broad definition of stewardship, extends the asset classes in scope and moves to outcomes-focused reporting. These changes will make insurers' stewardship reports more meaningful but they will also be challenging to implement.

The Financial Reporting Council's (FRC) 2020 Stewardship Code, published in October 2019, is the result of the FRC's first major review of its longstanding 2012 Code. It represents a fundamental overhaul of the code's principles, scope and reporting requirements. The aim of the 2020 Code was to bring stewardship expectations up to speed with current market practice and investor expectations, which have shifted significantly over the past eight years.

Insurers which were already signatories under the 2012 Code will notice that the new code is no longer largely just applicable to asset managers. It sets out tailored expectations for asset owners such as themselves, including monitoring and holding their asset managers and service providers to account. As a result, the 2020 Code requirements are now relevant to insurers throughout.

Central to the 2020 Code is a new definition of '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". The definition is intentionally broad and captures expectations of a variety of stakeholders, rather than just beneficiaries and providers of capital. The explicit inclusion of ESG considerations in this definition is a notable change which was lauded by investors but also seen as potentially difficult to implement. Against the background of the ongoing Covid-19 pandemic, however, firms may find that demonstrating they are acting in a way that promotes sustainable economic benefits will be equally challenging.

Another way in which the 2020 Code is extended is by adding asset classes other than listed equities into the scope of stewardship considerations. Whilst the 2020 Code particularly refers to fixed-income investments, signatories are also required to report on their stewardship of any other asset classes they are invested in. As a result, much larger parts of insurers' portfolios are now caught and will need to be reported on. For each of the now twelve principles, firms will need to explain not only their activities but also the effectiveness of these activities in achieving the principles' desired outcomes, a significant change from the previously largely policy-based reporting. This will require firms to re-evaluate whether they are effectively measuring the success of their activities and to rethink their stewardship disclosures.

As previously, compliance with the code is voluntary, but apart from reputational considerations, there are tangible benefits of complying. Notably, insurers will be able to use their stewardship reports to demonstrate compliance with most of the FCA's SYSC 3.4 rules, which require firms to develop and disclose their shareholder engagement policy, equity investment strategy and arrangements with asset managers.

As of January 2020, the FRC no longer accepts submissions under the 2012 Code. To be recognised as a signatory of the 2020 Code, firms must submit their first stewardship report under the 2020 Code in final form to the FRC by 31 March 2021. This means that, compared to the annual reporting cycle, firms have a few additional months to align their practices to the revised principles and to tackle the inevitable challenges in disclosing what they have done in a meaningful way.

This article first appeared in Insurance Day.