A new definition of stewardship for investors removes the word “environment”, but stresses that it should still focus on “long-term sustainable value for clients and beneficiaries”. The move has prompted calls in some quarters for regulators to scrap the new definition.

The phrasing is contained in a new consultation document and comes after complaints that previous wording suggested that the “primary” purpose of investment was the pursuit of “environmental and social objectives”.

Regulators at the Financial Reporting Council (FRC) also propose drastically reducing the number of code principles for asset owners and asset managers from 12 down to six.

The update comes after stiff criticism that the Code created an unnecessary reporting burden. One lobby group, the Capital Markets Industry Taskforce (CMIT), chaired by London Stock Exchange chief executive Julia Hoggett, also argued the definition meant “the purpose of the code has become unclear”.

The rewrite also follows a change in the FRC’s remit to “contribute to promoting the competitiveness and growth of the UK economy” and “streamline” non-financial reporting requirements. The FRC’s stewardship proposals provide greater guidance on what to report.

‘Important evolution’

Richard Moriarty, the FRC’s chief executive, says: “The consultations mark an important evolution of the Code, ensuring it maintains high standards of stewardship in a manner that continues to support UK growth and is more proportionate.”

The full new definition says: “Stewardship is the responsible allocation, management and oversight of capital to create long-term sustainable value for clients and beneficiaries.”

Previously it said stewardship is the “repsonsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustaiable benefits for the economy, the environment and society.”

There is support for the change. Jen Sisson, chief executive of the Interntional Corporate Governance Network (ICGN), says: “The definition focusing on sustainable long-term value creation chimes with the ICGN definition of stewardship, and the key messages we have heard from members and speakers at the ICGN conference in Melbourne. It’s critical that we keep our focus on all three parts—the sustainability, the long-term and the value creation.”

The FRC’s rewritten definition has not pleased everyone. ShareAction, an adviser to investors, has already called on the FRC to scrap the new definition following recent storms and flooding in Valencia viewed by many as further proof of climate change.

Fergus Moffatt, ShareAction’s head of UK policy, says: “As the impact of these challenges on our lives become more apparent every day, it’s concerning that one of the UK’s most important regulators is suggesting amending the definitions of stewardship in the Stewardship code to remove explicit references to social and environmental outcomes.”

Laith Cahill, a specialist in net zero stewardship at the Institutional Investors Group on Climate Change, laments the loss of any mention of “climate change” in the draft code. He adds that the code represents “a step backwards” and now “risks leaving us with a definition of stewardship that doesn’t rise to the challenges of today, let alone the future”.

Collaborative engagement

Concerns were previously aired that the new code would undermine the ability of fund managers to engage in “collaborative engagement”. Mention of collaborative engagement is stripped out of the new code.

Where the technique was previously mentioned in Principle 10 of the 2020 version of the Code, it is now replaced by a more general principle which says: “Signatories engage to maintain or enhance the value of assets.”

The FRC’s report says the bringing together of three principles (9,10 and 11) covering engagement into a single principle still means collaborative engagement can be ”an important and effective stewardship tool”.

“However, not every signatory will have the opportunity to engage collaboratively each year.”

Consultation on the new code continues until February next year.