Policy RoundUp - June 23

Dear Member,

It was lovely to meet so many of you at our AGM last week and our annual conference earlier in the month – the conference committee and executive team yet again put together such an informative and inciteful programme!

Meanwhile, the policy committee has also been extremely busy canvassing IRO views and responding to consultations, including on the possible regulation of ESG Ratings providers (supported by the vast majority of our IRO members), the quality of investment research, and the FCA’s proposed changes to the listing rules that we broadly support but also suggest some other issues that need addressing in order to enhance the attractiveness of the London markets. On a positive note, some recent research from UK Finance and EY on the competitiveness of capital markets found our markets have actually been faring better than recent media coverage would suggest.

The FCA has now been given a new objective to advance the UK’s long-term growth and competitiveness. The FCA and other UK regulators are also now required to take account of the Treasury’s Sustainability Disclosure Requirements (SDR) when making regulations, with net zero/deforestation considerations also introduced for the financial regulators. Meanwhile, the UK has finally signed a post-Brexit memorandum of understanding with the EU for increased cooperation on financial services regulation.

AI seems to pop up in every conversation, so it is timely that the CMA is conducting a review of the AI market to provide insight into the potential future direction of AI regulation in the UK. The CMA is focussing on foundation models, so is one of the first regulatory initiatives to focus on the technology that underpins ChatGPT.

The Government are using legislative measures to introduce a new duty (and criminal offence) that will require shareholders to provide companies with information (and updates) for their registers of members. Companies will also be given the ability to require that members provide this information, with member failure or false statements constituting a criminal offence. This legislation will also introduce a new “failure to prevent fraud” corporate offence, and make significant changes to Companies House.

As reported in May’s RoundUp, the Government is seeking views on the non-financial information UK companies are required to provide, including the costs/benefits of producing non-financial information, and the value of the information produced for the effective running of your company, in addition to how best to integrate International Sustainability Standards into the UK's reporting framework.

The ISSB has now published their inaugural IFRS Sustainability Disclosure Standards, ushering in a new era in international corporate reporting. The standards create a global common language for disclosing the effect of sustainability-related risks and opportunities on a company’s prospects, and can therefore help improve trust and confidence in company disclosures about sustainability factors to inform investment decisions. The UK government and FCA will now be considering how best to implement the standards in the UK, and the FRC is recruiting for their UK Sustainability Disclosure Technical Advisory Committee, which is an opportunity to get involved in shaping how the ISSB Sustainability Disclosure Standards will be introduced in the UK. Reaction in the UK has been positive, with the FCA confirming that it remains committed to playing an active role in supporting implementation of the ISSB Standards. Meanwhile, the FRC has published its responses to the ISSB’s proposals for its forward agenda and internationalising the SASB standards.  

ISSB is also partnering with WEF to compile learnings on early sustainability reporting efforts, including insights and practical examples, which will build on builds on WEF's Stakeholder Metrics initiative.

FRC research has shown a keen interest and understanding of ESG activities and reporting among Audit Committee Chairs. The FRC has also commissioned a report investigating how investors use proxy voting and ESG research, which has a number of interesting findings including that nearly three-quarters of investor respondents use ESG research in their investment decisions. Efforts to level the ESG playing field with private equity continue with new international guidance issued to help catalyse climate-related action across the private equity industry.

The EU's sustainability Agenda ,arches on, with the introduction of gender pay gap reporting measures backed up by powerful enforcement mechanisms that are not present in our equivalent UK regime. There has also been a US development this month, with the SEC requiring increased disclosure of share repurchases that is also applicable to SEC foreign private issuers.

Watch out for our Summer edition of Informed, which will include extensive write ups from the annual conference sessions, and the video and photo gallery can be accessed here.

Best wishes,

Liz Cole

Head of Policy and Communications

The Investor Relations Society

Tel: +44 (0) 20 7379 1763

liz.cole@irsociety.org.uk

https://www.linkedin.com/in/liz-cole

Society responds on ESG data and ratings (HM Treasury Consultation)

The findings from Society’s Easter IRO Member Survey underline the importance of ESG ratings to corporates, illustrate a level of dissatisfaction with the quality of engagement between companies and ESG ratings agencies, and indicate strong support for their regulation (90% of respondent IROs think they should be regulated by the FCA). We accordingly responded to this consultation supporting the regulation of ESG ratings agencies. We also

• recommended that the UK regime is based on recommendations from IOSCO to avoid regulatory arbitrage across jurisdictions,
• pointed out the need for consistency and harmonisation with overseas equivalent regulations eg the EU’s recently published Proposal for regulating ESG ratings providers, and
• called for an appropriate transitional period and a phased approach, allowing smaller agencies longer to adapt, and suggested consideration of an ongoing initial ‘start up’ period for new providers, to promote competition and innovation.

Society response to the FCA’s Listing Rules Proposals

Following a recent IR Society IRO Member Survey, the Society responded to the FCA consultation on proposed changes to the Listing Rules. The Society expressed general support for the proposed reforms, in light of our survey findings that most IRO respondents thought the FCA proposals would reduce regulatory barriers for companies and bolster UK competitiveness, although the Society highlighted some concerns that:

• the lack of shareholder approvals for major transactions could lead to significant legal and advisory costs in the early days until a more streamlined approach based on successful transactions establishes best practice,
• a generous transition period will be needed for current standard listings to allow them to comply with the more onerous ESCC ‘single category’ obligations, and
• the implications for index providers and passive fund managers are as yet unknown.    

We also reported that liquidity, depth of markets, and comparable peers are thought of by IROs as the most important factors in deciding where to list the proposals (regulation and valuations are also significant factors).

We then took the opportunity to highlight some more significant issues that we believe may also influence the attractiveness and competitiveness of the London markets, including the UK market’s sensitivity to Directors' remuneration and compensation structures, the quality and timeliness of Investment Research, the need to encourage funds flow into UK asset managers, the suggestion of establishing a framework that better enables companies to identify all short-sellers so that they can engage with them (if they wish), and the UK’s overlapping disclosure and filing obligations which could benefit from being streamlined and simplified.

UK Finance & EY research on competitiveness of capital markets

The research found that the UK remains a top tier global capital markets centre and continues to attract global capital. Data also indicates post-IPO share performance on UK exchanges performed better than in the US between 2017 and 2021 and the UK has grown and attracted more technology companies than public discourse would suggest.

Challenges remain however, and market participants identified several areas where improvement was required:

• Companies need more help to access UK capital markets.
• UK capital does not always reach UK companies.
• Frictions remain in our system that stifle flows of capital and information.
• Negative perceptions of the UK are too often influencing the decisions of founders and investors.

The research identified several areas that need to be addressed to arrest the negative trends that are developing amongst participants within our markets.

The full report can be found here. 

FCA’s new growth and competitiveness objective, and net zero/nature principle

The Financial Services and Markets Bill has received Royal Assent to become the Financial Services and Markets Act 2023 (FSMA 2023), making significant reforms to the regulation of financial services in the UK. It also gives the FCA (and PRA) a new secondary objective to advance long-term growth and competitiveness. The FCA has published a speech by Sheldon Mills, its Executive Director, Consumers and Competition, welcoming this secondary competitiveness and growth objective, setting out how the FCA has been promoting growth and competitiveness ahead of this upcoming secondary objective, how the FCA is ready to do more and how the regulator will not bend its supervisory rules to promote competitiveness at all costs.

FSMA 2023 also furthers the UK’s sustainability agenda, including:

• putting Sustainability Disclosure Requirements on a legislative footing and requiring the FCA to take account of Treasury’s SDR when making regulations,
• introducing a new, target-based regulatory principle to work towards net zero and the conservation/enhancement of nature for the financial regulators, and
• requiring a review of adequacy of the regulation of the UK financial system in eliminating financing of deforestation.

UK/EU Post-Brexit MoU on financial services sets out plans for UK-EU cooperation

Originally expected by March 2021, the UK and EU have finally signed a memorandum of understanding, setting up a framework for increased cooperation on financial services regulation. While the MoU does not make any substantive changes to the status quo, it demonstrates a continued normalisation of regulatory relationships in financial services post-Brexit and early reactions from industry and trade bodies have been positive.

The MoU establishes an ongoing forum for the UK and the EU to discuss voluntary regulatory cooperation on financial services issues. Both sides will share information, work together towards meeting joint challenges and coordinate positions where appropriate on issues ahead of international meetings.

UK (CMA) Review of AI

In May, the Competition and Markets Authority (CMA) consulted on its decision to carry out an initial review of the AI market. To provide useful insight into the potential future direction of AI regulation in the UK.

This review follows the March 2023 AI White Paper, which adopted a light-touch approach to regulating AI, and this CMA initial review is one piece of the UK’s developing regulatory approach to governing AI. The CMA is focussing on foundation models, meaning the CMA’s review is the one of the first initiatives by a UK regulator to focus on the technology that underpins ChatGPT and other Generative AI products that have seized the limelight during the first half of 2023.

Within the UK’s regulatory landscape, the CMA’s review may illustrate how well the government’s approach to AI regulation is working. In its recently published Response to the government AI White Paper, the CMA is broadly supportive of the decision to leverage existing regulatory regimes to tackle AI while also creating a coordination function for monitoring and support.

In carrying out its review, the CMA will issue information requests to stakeholders including developers, researchers, suppliers of inputs/data, customers, investors and other industry participants and commentators. The CMA will publish a short report setting out its findings in early September 2023.

Economic Crime and Corporate Transparency Bill (ECCT Bill)

The Economic Crime and Corporate Transparency Bill (ECCT Bill) has completed the report stage in the House of Lords, which contains draft amendments to the Companies Act 2006 to facilitate the reform of Companies House. The ECCT Bill is expected to become law later this year.

Key additions to the Bill made by the House of Lords include:

• New failure to prevent fraud corporate offence – Under the proposed new offence, an in-scope organisation will be strictly liable if a specified fraud offence is committed by an employee, agent or subsidiary, and the organisation did not have reasonable fraud prevention procedures in place.
• Criminal offences relating to the register of members – A new duty will be imposed on members to notify to companies the information required to be included on the register of members (being the member’s full name and a service address) and any changes to that information. Companies will also be able to serve a notice on members requiring them to provide the information. Failure to supply the information or the making of a false statement will be a criminal offence.
• Sanctions and director disqualification – The Sanctions and Anti-Money Laundering Act 2018 will be amended so that individuals may be disqualified from being directors for breaches of the UK sanctions regime.

DBT seeks views on ways to streamline non-financial reporting

As reported in May’s RoundUp, the Department for Business and Trade has published a call for evidence seeking views on the non-financial information UK companies are required to provide. The call for evidence seeks views on the costs and benefits of producing non-financial information, the value of the information produced for the effective running of your company, and how the non-financial reporting regime might be improved in the future. It also investigates some wider reporting requirements such as modern slavery and gender pay gap reporting, and how these fit within wider non-financial reporting frameworks. Members are able to have their say here (DBT questionnaire is open until 16^th August).

International Sustainability Standards Board (ISSB) publishes inaugural standards

On 26 June 2023, the International Sustainability Standards Board (ISSB) issued its first two IFRS Sustainability Disclosure Standards: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-related Disclosures (IFRS S2). Both IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after 1 January 2024.

Focusing exclusively on capital markets means that ISSB Standards only require information that is material, proportionate and decision-useful to investors.  Moreover, by beginning with climate, companies can phase-in their sustainability disclosures (a ‘climate first’ transition option is available, which allows an entity to provide only climate-related disclosures in its first year of applying IFRS S1 and IFRS S2). On the basis that sustainability performance is fundamentally linked to financial performance, the standards are designed to ensure that corporates provide sustainability-related information alongside the delivery of their financial statements (in the same reporting package). However, once the standards come into effect in January 2024, companies will have a one-year transitional relief period from the ‘simultaneous reporting’ requirement.

Mandatory application of IFRS Sustainability Disclosure Standards depends on each jurisdiction’s endorsement or regulatory processes. The information required by the ISSB Standards is designed to be provided alongside financial statements as part of the same reporting package.  (The application of IFRS Sustainability Disclosure Standards is not linked to the application of IFRS Accounting Standards - ISSB Standards are built on the concepts underpinning IFRS Accounting Standards but have been developed to work with any accounting requirements.)

The ISSB received more than 1,400 comment letters on the EDs published last year, which enabled them to strengthen the Standards, ensuring they are cost-effective, market-informed and elicit decision-useful disclosures. The Standards include guidance to assist companies applying the Standards and include basis for conclusions on IFRS S1 and on IFRS S2 setting out our considerations in the development of the Standards. Alongside the Standards the ISSB has also published an Effects Analysis describing the likely benefits and costs of their implementation and a Project Summary setting out the key aspects of the project.

The ISSB also published a Feedback Statement that summarises the most significant feedback we received and how the ISSB considered and responded to it. 

The FCA welcomed these standards, which the FCA considers answer the clear market demand for complete, consistent, comparable and reliable corporate sustainability disclosures. The FCA confirmed that it remains committed to playing an active role in supporting implementation of the ISSB Standards and helping to build capacity to adopt these around the world.

WEF and ISSB are partnering to compile learnings on early sustainability reporting efforts.

Key points:

• World Economic Forum continues its work with the International Sustainability Standards Board (ISSB) by convening a group of sustainability professionals focused on sharing best practices and practicalities of adopting ISSB Standards.
• New group to provide insights and practical examples to ISSB after release of the ISSB’s first sustainability standards at end of June.
• Collaboration builds on the Forum's Stakeholder Metrics initiative and previous work with the IFRS Foundation and is supported by a new Memorandum of Understanding (MoU) between the World Economic Forum and ISSB.
• Read more about the Stakeholder Metrics initiative here.

FRC responses to ISSB Agenda and SASB

The Financial Reporting Council has submitted responses to the ISSB on both its consultations on the ISSB Agenda Priorities (open until 1 September 2023), and its proposed Methodology for Enhancing the International Applicability of the SASB Standards. The FRC also reiterated its strong support for the development of high-quality global standards for sustainability-related reporting.

FRC: Audit Committee views on ESG activity and reporting

In FRC research published in June, Audit Committee Chairs have shown a keen interest and understanding of ESG activities and reporting. The report highlights the work that ACCs are already doing in this space, recognising the importance of ESG as an integral part of good business practice and effective stakeholder communication. 

ACC's primary role relates to risk management, compliance, and ensuring effective reporting, and they call for practical, sector-specific guidance to measure environmental and social activities, and best practice examples to ensure meaningful ESG reporting without excessive reporting requirements.

FRC Report on the influence of proxy advisors and ESG rating agencies on FTSE 350 companies

The FRC has published detailed research into the impact of proxy voting advisors and ESG ratings agencies on actions and reporting by FTSE350 companies and investor voting decisions. The FRC had commissioned Morrow Sodali and Durham University to review the impact of proxy voting advisors and ESG rating agencies on the actions and reporting of FTSE 350 companies, and on investor voting.

The report discusses how investors use proxy voting and ESG research, and has a number of interesting findings from the point of view of both investors and companies. These include:

• the assumed connection between negative voting recommendations from proxy advisors and voting outcomes is less strong than is sometimes suggested; and
• research relating to ESG does inform investor decision making – 72% of the investors which responded to the study said that they used this research in their investment decisions.

The FRC believes this will be a valuable tool for the various consultations underway about the impact of proxy voting agencies’ activities on corporates, particularly on key issues such as remuneration policies. The research will also be shared with the FCA and Capital Markets Industry Taskforce to aid their ongoing consultations on how proxy voting agencies interact with corporates and investors as part of corporate governance programmes. The report also notes future work in this area, including initiatives to regulate ESG rating agencies.

Your chance to help shape UK sustainability reporting

The FRC is recruiting for its new UK Sustainability Disclosure Technical Advisory Committee, which will provide recommendations for endorsing the ISSB Sustainability Disclosure Standards for use in the UK.

Net zero guidance for private equity

The Institutional Investors Group on Climate Change (IIGCC) has published a Net Zero Investment Framework Component for the Private Equity Industry, which aims to provide a consistent foundation for asset owners and asset managers to align portfolios with net zero emissions by 2050 or sooner. It focuses on buyout and growth equity investments, including related strategies such as co-investments, fund of funds, and secondaries. The guidance is intended to help catalyse climate-related action across the private equity industry and become a private equity equivalent of the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. The IIGCC is the European membership body for investor collaboration on climate change with more than 400 members with over €65 trillion in assets under management.

The EU’s New Pay Transparency Directive

A bold step forward in tackling and enforcing equal pay, the EU Pay Transparency Directive came into force in June, with Member States required to implement the Directive into national law by 7 June 2026.

The Directive introduces gender pay gap reporting measures similar to those that already exist in the UK. However, the reporting requirements are backed up by powerful enforcement mechanisms, not present in the UK regime. Other key provisions include an obligation to remedy pay gaps of 5% or more and increased pay transparency for prospective and current employees.

Although the Directive (once locally implemented) will only strictly impact EU employers and non-EU employers operating in EU member states, it could have wider effect if it raises employee expectations regarding pay transparency and pay gaps. Linklaters have produced an overview of the EU Pay Transparency Directive and how, by setting new standards, the Directive could influence the development of future regulation in the UK.

New SEC share buyback/repurchase disclosure rules

The US Securities and Exchange Commission (SEC) has adopted amendments requiring specific quantitative and narrative disclosures related to an issuer’s share repurchases. The new rules will significantly increase the level of disclosure that has historically been required about share repurchase activity in SEC filings. SEC-registered issuers that qualify as “foreign private issuers” (FPIs) will need to comply with this new regime in essentially the same manner as US domestic issuers notwithstanding the buyback disclosures that may be required in their home jurisdictions. There is little home country relief for FPIs under the new rules.

To learn about the current requirements, new requirements and the implications for FPI’s, HSF have put together a briefing available here.