The revised Code is likely to encourage a more robust and substantive review of ESG issues by institutional investors.

By Paul A. Davies and Michael Green


The UK Stewardship Code (the Code) was originally published in 2010 following a review of corporate governance. The Financial Reporting Council (FRC) has responsibility for the Code, and promotes the long-term success of companies, outlines principles underlying an effective board, and fosters active investor monitoring and engagement of companies. All UK-authorised asset managers are required to produce a statement of commitment to the Code or to explain why the Code is not appropriate for their business model (the “comply or explain” approach discussed below). As such, there are 305 signatories to the Code, which primarily include asset managers and asset owners (pension funds, endowment funds, and charities).

The Code was last revised in 2012, and the FRC notes that there have been significant changes in the interim. In particular, legal and international developments concerning ESG issues and legal developments concerning the application of ESG issues in the context of trustees’ fiduciary duties (including pension trustees). For more information on ESG issues, please see Latham’s previous blogs here and here.

In January 2019, the FRC published a consultation on a revised Code. The consultation will run until 29 March 2019, with the final version of the Code due for publication by summer 2019. This revised Code aims to increase demand for more effective stewardship and investment decision making, in particular, through incorporating ESG factors.

The Principles of the Code

The Code operates on a comply or explain platform and identifies seven key Principles that require signatory institutional investors to:

  1. Disclose publicly their policy on how they will discharge their stewardship responsibilities
  2. Implement a robust policy on managing conflicts of interest in relation to stewardship, which should be disclosed publicly
  3. Monitor their investee companies
  4. Establish clear guidelines on when and how they will escalate their stewardship activities
  5. Act collectively with other investors if appropriate
  6. Have a clear policy on voting and disclosure of voting activity
  7. Report periodically on their stewardship and voting activities

Proposed Incorporation of ESG Issues Into the Code

The proposed changes to the Code include developing organisational purpose, disclosing stewardship objectives and governance, aligning with the UK Corporate Governance Code, and amending reporting requirements. The revised Code will introduce Principles and Provisions, supported by Guidance. All signatories must follow the Principles on an “apply and explain” basis, requiring them to apply the Principles and explain clearly and meaningfully how they have done so. All signatories must follow the Provisions on a comply or explain basis, requiring them to explain meaningfully any non-application of the Provisions.

The revised Code will define stewardship as “the responsible allocation and management of capital across the institutional investment community, to create sustainable value for beneficiaries, the economy and society”. The revised Code also identifies the primary purpose of stewardship as looking after beneficiaries’ assets that have been entrusted to the care of others. As such, the consultation to the revised Code indicates that the Code will include explicit reference to ESG factors, and that signatories are expected to give consideration to material ESG factors when fulfilling stewardship responsibilities. Signatories must also demonstrate how those material ESG factors are considered in the decision-making process. The revised Code does not define material ESG factors, but it does include climate change as a material factor.

The key provisions of the Code in which ESG changes are proposed include:

Principle E

This Principle requires signatories to integrate stewardship with their investment approach and demonstrate how they take into account material ESG factors, including climate change.

Provision 9

Asset owners and asset managers are encouraged to disclose the structures and processes in place to ensure that information gathered through stewardship activities is factored directly into investment decision making.

The signatory is expected to demonstrate how stewardship is integrated with investment approach, and how stewardship can be evidenced by team and joint engagement meetings, presentations, information-sharing across platforms, and involvement of ESG teams.

Provision 11

Asset owners are encouraged to ensure that investment and stewardship mandates reflect beneficiaries’ investment time horizon, and asset managers are encouraged to align investment and stewardship activities with beneficiaries’ investment time horizon. Furthermore, both asset owners and managers are encouraged to demonstrate how ESG issues are considered.

Provision 13

Asset owners are encouraged to provide clear and actionable asset assessment criteria for managers, so that appropriate investments are made in accordance with strategy. This can be evidenced by explaining the methods and detail of criteria given to managers for pre-investment monitoring, for example outlining the extent of engagement on ESG issues pre-issuance. Asset managers will be encouraged to evaluate assets and investments accordingly.


The revised Code has been broadly welcomed, although some have expressed concerns about whether the Code will encourage a robust and substantive review of ESG issues, or whether ESG will be reduced to tick-box items on a checklist.

Further, finalisation of the revised Code by summer 2019 may also depend on the proposed transformation of the FRC, which is to be replaced by the Audit, Reporting and Governance Authority. This new Authority will be a statutory body with a new mandate, new leadership, and stronger powers.

Latham will continue to follow and report on developments in this area.