The FRC’s latest review of stewardship reporting

At the end of November 2022, the Financial Reporting Council’s (FRC) published the latest update on its expectations for 2023 stewardship reporting, including some important changes to this year’s application timetable for the Stewardship Code.

In particular, the FRC will only take new applications in the April 2023 submission window, which it has extended to May 2023 for asset owners. Following this, the next submission deadline will be in October 2023, but this will only be open to “renewal applications from existing signatories”.

The FRC explains that this change is driven by the pending review of the regulatory framework for stewardship, something it is expecting to consult on later this year and is in the context of the FRC’s transformation into the new Audit, Reporting and Governance Authority (ARGA).

Updated submission timetable for asset owners

In extending the next report submission deadline for asset owners by one month, the FRC acknowledges the significant additional challenges and time required for these firms to collate the information needed from asset managers and service providers.

In collecting such information, not only do asset owners and those investing indirectly need to have the expected governance, processes, systems, and data, but they also need to address the FRC’s call for specific improvements in their next report. In particular, the FRC set out its expectations for greater level of evidence and disclosure in three areas:

• the extent of any indirect investments (i.e. disclose assets under management (AUM) by asset class and direct/indirect investment);
• how stewardship requirements and expectations are included in tendering for third-party services and setting of investment mandates; and
• monitoring and holding third parties to account in terms of the engagement, collaboration, escalation, and exercising of rights and responsibilities done on their behalf.

The FRC re-emphasises its focus on evidence and assurance

The FRC draws into focus the need for firms to relay the evidence on which their stewardship reporting is based. In its 2021 update paper on Stewardship reporting, the FRC set out that firms should “include enough information to address the ‘Context’ reporting expectations, but policy statements alone are not sufficient”. Now, in its latest paper, it explains that “some reports rely too much on context and policy disclosure, rather than evidencing their application of the Code”.

This is emphasized by how boards assure themselves on the validity and completeness of their stewardship reporting. The FRC stated that it is not seeing much use by signatories of either formal internal or external assurance on reporting and underlines that it is its expectation for signatories to “disclose the rationale for their choice of assurance. As concerns about greenwashing continue, signatories should consider what assurance will be appropriate in future to reassure their clients and governing bodies.’’

When assessing the use of external assurance over stewardship reporting, some of the factors that signatories might consider include:

• Readiness: firms wanting external assurance need to be confident their underlying data, processes, and controls used for their stewardship reporting are in a form that will be readily accessible and stand up to rigorous external testing.
• Resourcing: external assurance over stewardship reporting is likely to place a significant demand on teams that will be already overstretched.
• Credibility: external assurance enhances the credibility of reported information, builds confidence, and reinforces relationships of trust with stakeholders who may rely on it as part of their decision making.
• Confirm and challenge: firms use external assurance to obtain independent challenge and confirmation of the information, case studies, representations and narrative set out in stewardship reporting.

Key considerations for firms

1. The FRC’s new timetable for submissions means that firms who would like to be a signatory but have not yet applied now only have a few months to complete and submit their report.
2. Engaging in the forthcoming consultation on the stewardship framework will be important for signatories and stakeholders to ensure it can be retained as a valuable initiative for all parties.
3. Signatories to the Stewardship Code and those applying to be should carefully assess the level and type of assurance they will use to meet the expectations of internal and external stakeholders and share this in their report.