The Financial Reporting Council (FRC) has been urged to keep a "robust focus" on sustainability in its stewardship code definition, with concerns that the current proposed definition could undermine many of the other positive measures highlighted in the code.

The FRC recently consulted on its proposed revisions to the UK Stewardship Code, including changes to amend the definition of stewardship and reduce industry reporting requirements.

In particular, the FRC proposed a change in the code's definition of stewardship to support more transparent conversations between actors in the investment chain about their investment beliefs and objectives, while being sufficiently broad to be applicable to signatories across the investment chain and different asset classes.

In its response, however, the UK Sustainable Investment and Finance Association (UKSIF) said it was supportive of alternative definition of ‘stewardship’ than the one proposed in the FRC’s consultation proposals, emphasising the need to keep sustainability at the core.

Given this, its proposed definition, which is supported by the Pensions and Lifetime Savings Association (PLSA) and a number of UKSIF’s members, is: “Stewardship is the responsible allocation, management and oversight of capital, having regard to dependencies and impacts on the economy, the environment and society, to create long-term sustainable value for clients and beneficiaries”.

In its response, UKSIF also outlined an additional proposed option for an alternative definition, although it clarified that this is very much secondary to its core proposal.

"Broadly speaking, we worry that the current proposed definition could help undermine many of the other positive measures highlighted in the code consultation," the group stated.

In addition to this, UKSIF said that it would like to see the supporting language to the ‘stewardship’ definition give consideration to referencing the Financial Markets Law Committee (FMLC) opinion published last year, which could help clarify in the revised Code that stewardship is consistent and aligned to the fiduciary duties of investors.

Hymans Robertson investment associate consultant, Chris O’Bryen also warned that "the definition of stewardship must not be weakened, and the code should continue to focus on meaningful activity and outcomes.”

However, the Investment Association (IA), although in favour of plans to update the definition, raised concerns regarding the term “sustainable”, which is a restricted term under FCA Naming and Marketing Rules.

To avoid unintended compliance risks, the IA recommend that the FRC and Financial Conduct Authority (FCA) work together to promote regulatory alignment and publicly clarify whether a stewardship report acts as a “financial promotion” under the rules.

In addition to this, it echoed UKSIF's broader concerns, acknowledging that some of its members do not support the removal of the benefits to the economy, the environment and society from the definition, with some concerned that this removes the connection with the positive externalities of stewardship and de-emphasises the importance of long-term systemic risks that investors are exposed to.

This was echoed by WHEB Asset Management stewardship and climate analyst, Rachael Monteiro, who said that "any future definitions of stewardship must acknowledge the financial system's economic, environmental and social impacts and dependencies and explicitly address system-level risks that threaten market stability".

"The vigorous debate about the appropriate definition of stewardship has been particularly insightful," she stated.

"The intensity of this debate in itself underscores the significant role that stewardship and engagement now play as powerful levers for influence in equities and across wider asset classes."

However, the IA clarified that, on the whole, members believe that there is enough flexibility in the definition to still pursue these aims where they align with clients’ investment objectives.

IA director of stewardship, risk and tax, Andrew Ninian, said: “The revised definition of stewardship is supported by the majority of IA members, as it focuses on financial materiality and the role of stewardship in delivering long-term value for clients, while also meeting their broader investment objectives."

More broadly, UKSIF suggested that the ‘Policy and Context’ disclosures should take place on a triennial basis, instead of annually as proposed in the consultation, in order to help address widespread investment industry concerns relating to the reporting burden presented by the existing code.

The IA agreed, stating that while the proposed split between a Policy & Context Disclosure and an Activities & Outcomes report is a "positive step towards" improving transparency and usability of reporting, requiring annual submission and republication could inadvertently increase compliance burdens.

In addition to this, UKSIF encouraged the FRC to consider introducing a new engagement tool, or similar, to smaller prospective signatories, which would assist them in meeting the code's high bar, helping to promote a "more level playing field".

UKSIF head of policy and regulatory affairs, Oscar Warwick Thompson, said: “As we mark five years since the introduction of the 2020 Code, we urge the FRC to maintain the fundamental purpose of this important, internationally leading framework.

“It is particularly essential that the finalised ‘stewardship’ definition is not perceived to dilute the code’s purpose as a high-quality benchmark for investor stewardship and engagement.

"It should still signal the importance of signatories considering the wider economic, environmental and social systems in which they exist, while also addressing concerns with the current definition’s causal links implied between stewardship and real-world outcomes.

"We are optimistic our proposals for an ‘alternative’ definition could strike the right balance here, by reflecting the needs of different market participants and investment approaches and maintaining the code’s overall ambition.”

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