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The UK’s auditing watchdog has proposed that fund managers take environmental, social and governance factors into account when overseeing the companies in which they invest.

Launching its consultation on the stewardship code, a set of principles that dictates how asset managers hold their investee companies to account, the Financial Reporting Council also suggested investors must report on how their purpose, values and culture help them meet their obligations to clients.

The FRC has also proposed broadening the code — which was first launched in 2010 and has been copied around the world — into other assets beyond public equities. The consultation was opened on Wednesday and closes at the end of March. The new code is due to come into force in July.

A government-backed report into the FRC in December called on the code to be scrapped if it was not sufficiently revamped.

“The explicit reference to environmental and social factors throughout the document is an extremely positive step forward and the recognition by the regulator that ESG factors can be financially material — and in such instances should be considered by signatories — is good news for companies, investors, savers, and the environment,” said Fergus Moffatt, head of UK policy at ShareAction, a campaign group.

The FRC's revamped code will require fund managers to take ESG factors far more seriously. “Signatories are expected to take into account material ESG factors, including climate change, when fulfilling their stewardship responsibilities,” it said.

Since the UK’s code was launched nearly a decade ago, at least 20 other codes have followed globally. Some have taken a stricter line on corporate oversight. Governance experts have questioned whether the UK has lost its edge and its ability to attract public companies and investor capital.

But Andy Griffiths, executive director of the Investor Forum, a partnership of 43 fund managers and asset owners with a combined £16tn of assets under management, said a better indication of stewardship strength was how investors engaged with companies.

“What we need to see much more of is the innovation that managers are undertaking,” he said. “The emphasis should be on what practitioners are doing rather than who has the best code.”

The Investor Forum, which liaises with companies on behalf of fund managers, took part in six engagements last year, notably with Unilever over its controversial decision to move its headquarters away from London.

Win Bischoff, chair of the FRC, said: “The new stewardship code will play a key role in complementing the stronger corporate governance provisions that took effect at the start of this year.

“It sets both higher expectations for stewardship practice and introduces more rigorous public reporting with a focus on outcomes and effectiveness. We believe the changes proposed put it at the forefront of stewardship internationally. ”​

UK fund managers are required to comply with the stewardship code or explain why they have not.

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