Dear Member,

Over the Summer, there was no slow down in policy activity! We surveyed members on the proposed amendments to the CG Code, and I then hosted a joint webinar with the FRC to help keep you informed (recording links below if you missed it). We then used the findings to develop our response. AIM companies should also watch out for the revised QCA Corporate Governance Code, which is expected to be released in October.

The Society will comment tomorrow on the Voluntary Code of Conduct being developed for providers of ESG data and ratings, referring to the findings from our ESG data/ratings survey among our IRO Members at Easter this year, which illustrate a level of dissatisfaction with the current quality of engagement between companies and ESG data and ratings agencies. This principles-based Code covers Governance, Systems and Controls, Management of Conflicts of Interest and Transparency, and members may also wish to comment on this given the amount of time IROs spend dealing with these agencies (comments due by close tomorrow, Thursday 5th October - see links below).

The Investor Forum has published Key Voting Trends from 2023 AGM Season, highlighting the Forum’s commitment to fostering dialogue, collaboration, and knowledge-sharing between boards and investors. 

The UK is also pressing ahead with preparations for UK sustainability reporting requirements, with the Government confirming in early August that Corporates will be required to disclose the sustainability related risks and opportunities that they face. The formal UK endorsement mechanism to assess the suitability of the ISSB Standards for adoption in the UK has already begun, with an FRC call for evidence on UK Sustainability Disclosure Standards (UK SDSs) that will be based on the ISSB’s standards, examining their usefulness, technical feasibility and proportionality of costs to benefits (as mentioned in July’s RoundUp). Members may wish to submit comments on this, which are due by next Wednesday, 11th October.  Another opportunity to shape this work is to join the FRC Stakeholder Insight Group (SIG), which coinsiders the FRC work across its wide remit including corporate governance, stewardship and non-financial reporting, applications are due by this Friday 6th October.

The FCA is strongly encouraging listed companies to start considering the new ISSB Standards and how to build them into their future reporting plans, announcing that it will consult on the implementation of disclosure rules based on the UK SDSs and disclosure of climate transition plans in the first half of 2024, with an aim for disclosure requirements applicable for financial years beginning on or after 1 January 2025 (with reporting from 2026).

The IASB is also exploring how to improve reporting of climate-related and other uncertainties in the financial statements, in conjunction with the ISSB. Meanwhile, some reports have been issued aiming to improve connectivity of climate-related reporting between sustainability related financial disclosures and financial reporting accounting standards. 

Nature reporting has also taken a big step forward, with the TNFD issuing their final recommendations for nature-related financial disclosures The framework is modelled on the Task Force on Climate-related Financial Disclosures (TCFD) framework but is focused on helping businesses assess nature-related impacts, dependencies, risks and opportunities. If you are not sure where or how to start on your nature-reporting journey, A4S have issued some helpful guidance including a ‘Maturity Map’.

For those of you who will be reporting under the EU’s CSRD with its double materiality approach, it may be welcome news that GRI and EFRAG have published a joint statement on the high level of interoperability that has been achieved between the European Sustainability Reporting Standards (ESRS) and the GRI Standards.

If you are considering issuing ESG data sets (eg relevant to the SFDR Principle Adverse Impacts (PAIs)) to help your investors and asset managers, you should know that the EU is carrying out a far reaching review of the SFDR, which could result in the introduction of a labelling mechanism and/or more precise definitions of the product categorisations. This could result in changes to the ESG disclosure obligations for funds sold in the EU, given industry concerns on the costs and difficulty of compliance with the current rules.

We expect to see the FCA’s long anticipated policy statement on Sustainability Disclosure Requirements (SDR) and investment labels in Q4.  Meanwhile, some independent guidance has been published on the design and implementation of a UK Green Taxonomy, seeking to draw lessons from the issues around the EU’s SFDR and EU Green Taxonomy.

For those considering assurance on sustainability reporting, there are now some draft international standards that are out for consultation (closing 1st December).  

The FCA is also consulting again on a new regulatory framework on diversity and inclusion (D&I) in the financial sector, aiming to establish minimum standards, greater consistency and transparency across the sector.

Further afield, the SEC has adopted rules requiring disclosure by foreign private issuers of material cybersecurity incidents and certain information regarding cybersecurity risk management, strategy, and governance.

Finally, looking ahead, it will be a busy Autumn/Winter as the Transition Plan Taskforce is expected to publish final transition plan disclosure framework/ guidance in October, and we are also expecting consultations from the DBT on:

• scope 3 GHG emissions reporting (expected Q3),
• disclosure of transition plans (expected Q4), and
• UK requirements for nature-related financial reporting, now that the TNFD framework has been finalised (expected Q4).

As mentioned above, also in Q4 we expect to see the FCA’s long anticipated policy statement on Sustainability Disclosure Requirements (SDR) and investment labels, and the FRC’s Stewardship Code review, to which record numbers are now signed up, representing £44.6 trillion assets under management.

I hope to see you at some of our upcoming events,

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 comments on Corporate Governance Code proposals

Drawing on findings from recent member research on the FRC proposals most relevant to IROs, the Society response is generally supportive of the proposed reforms.

However, it calls for more flexibility and less prescription in certain areas (for example, giving audit committee oversight of narrative and sustainability reporting), and for more clarity around disclosure of ‘usage’ of malus and clawback arrangements.

The Society also identifies several areas where more detailed guidance would be helpful, including:

• ‘good’ outcome reporting,
• ‘significant’ appointments for ‘over-boarding’ disclosure, and
• audit committee engagement with shareholders.

The response also reflects issues raised in our joint webinar with the FRC on 6^th September - the recording is in the knowledge bank for members, and non-members can access it directly via Vimeo.

CG Code Review - Joint webinar with FRC

On 6^th September we held a webinar, in partnership with the Financial Reporting Council (FRC), and featuring a panel of IRO and financial service providers, exploring the proposed changes to the UK Corporate Governance Code and the potential impacts on Investor Relations.

QCA Corporate Governance Code

The QCA are also updating the QCA Corporate Governance Code, which is used by nearly 90% of companies on the AIM market, as well as those on the Aquis Stock Exchange and other markets or pre-IPO. QCA intend to publish the revised version in the Autumn (October).

Policy update: Record numbers sign up for Stewardship Code

The FRC has announced a record number of successful signatories to the UK Stewardship Code following the latest round of applications, with an additional 27 organisations bringing the number of signatories up to 277, representing £44.6 trillion assets under management. This includes a wide range of organisations by size, asset class and strategy comprising 189 asset managers, 69 asset owners and 19 service providers. The FRC reported continued progress in the reporting of stewardship activities and outcomes by signatories, for example, in improving the board diversity at investee companies and improved disclosure related to climate change and biodiversity.

Help shape the future of ESG ratings in the UK

Feedback on a Voluntary Code of Conduct for providers of ESG data and ratings is is due by tomorrow (Thursday, 5th October), and members may wish to comment on this principles-based Code covering their Governance, Systems and Controls, Management of Conflicts of Interest and Transparency. 

2023 AGM season Facts & Figures 

Key findings from the Investor Forum's 2023 AGM Resolution Report (here), include a comprehensive analysis of voting patterns at 212 FTSE 350 company (excluding Investment Trusts) AGMS held by the end of July. 

In the first 7 months of 2023, 79 resolutions out of a total of more than 4,300 proposed, received votes of 20% or more against the management recommendation with only 7 resolutions obtaining more than 50% dissent. Key trends:  

• Strong Investor Support: Approximately 80% of companies received robust backing from investors, as none of their resolutions recorded a significant vote against (20% or higher). 
• Evolving Voting Patterns: Interestingly, Remuneration, which had been the most contested issue since 2019, saw a significant shift this year. It dropped to the third position behind concerns about Capital Related resolutions and Director's resolutions. 
• Rising Concerns: The most notable development was the surge in votes against Capital Related resolutions, nearly tripling from previous years, signalling growing attention from investors in this area. 
• Limited Focus on Remuneration: Only 28 resolutions, representing a mere 0.7% of total resolutions, pertained to Remuneration, suggesting a broader shift in investor priorities. 

UK Sustainability Disclosure Standards

On 2 August 2023, the Department for Business and Trade published guidance on the government's plans to create UK Sustainability Disclosure Standards. Corporates will be required to disclose the sustainability related risks and opportunities that they face. The standards will form the basis of future legislative or regulatory requirements for corporate sustainability reporting.

The guidance sets out that:

• UK Sustainability Disclosure Standards will be based on the IFRS Sustainability Disclosure Standards issued by the ISSB. The government previously made plans to assess the suitability of IFRS Sustainability Disclosure Standards for endorsement in the UK, and the creation of UK Sustainability Disclosure Standards.
• The Secretary of State for Business and Trade will consider the endorsement of the IFRS Sustainability Disclosure Standards, to create the UK Sustainability Disclosure Standards, by July 2024. It is expected that UK endorsed standards will only differ from the global baseline if necessary for UK specific matters.

Your chance to help shape the future of UK sustainability reporting

The formal UK endorsement mechanism to assess the suitability of the ISSB Standards for adoption in the UK has since begun, with an FRC call for evidence on the prospective use of the ISSB Standards in the UK.

This call for evidence seeks views on whether application of these standards in a UK context will result in disclosures that are understandable, relevant, reliable and comparable for investors. It also considers technical feasibility, timeliness alongside financial reporting, and proportionality of costs to benefits.

This assessment will aim to ensure that the standards endorsed by the Government for use in the UK are appropriate for UK companies. These UK Sustainability Disclosure Standards (UK SDSs)  will then provide the basis for future obligations within company law and FCA requirements for listed companies, ensuring a single set of standards is applied across the UK regulatory framework.

The call for evidence closes on Wednesday 11th October, and members may wish to submit their own comments.

FRC Stakeholder Insight Group: Open for applications

Calling all interested applicants who want to help shape the FRC’s work across its wide remit - corporate governance, stewardship, non financial reporting, audit/actuarial and accounting standards - ensuring better outcomes for preparers, investors, auditors, advisors and their stakeholders

The FRC is welcoming applications by this Friday 6^th October for its Stakeholder Insight Group (SIG), a panel that represents preparers, investors, audit committee chairs and other key parts of the stakeholder universe, such as reporting framework owners and civil society groups.

Timetable for FCA implementation of sustainability disclosure rules and transition plans

The FCA announced in PMB45 that it expects to consult on the implementation of disclosure rules based on the UK SDSs in the first half of 2024, and has strongly encouraged listed companies to start considering the new ISSB Standards and how to build them into their future reporting plans. The FCA is therefore encouraging listed companies to:

• continue to improve annual reporting standards in line with the current TCFD framework, focusing on identifying applicable risks of climate change to their businesses and disclosing any material climate related matters in their financial statements, and
• voluntarily engage with the ISSB Standards ahead of any endorsement decision in order to identify opportunities to improve their processes and prepare for the introduction of the new framework (including responding to the FRC call for evidence on UK SDSs, see above).

Assuming that the UK endorsement of the first two ISSB Standards is completed by July 2024, the FCA aims to finalise its approach by the end of 2024 with the new requirements applicable to financial years beginning on or after 1 January 2025, with the first reporting being required in 2026. 

In PMB45, the FCA:

• sets out key features of the FCA's process for implementing the standards and plans for consultation,
• explains how it will continue to supervise existing disclosures under the TCFD framework, until any new requirements are implemented (The FCA will consult on updating its TCFD-aligned disclosure rules to refer to the UK-endorsed ISSB Standards, building on the requirements of Listing Rules 9.8.6R (8) and 14.3.27R. The current regime requires listed entities (other than closed-ended investment entities) to report against the TCFD framework on a 'comply or explain' basis, whereas the new regime would involve mandatory disclosures), and
• advises issuers on what they can do now to prepare for any future obligations relating to reporting on the ISSB standards.

The FCA also confirmed in PMB45 that (along with this ISSB consultation) it will consult on its proposals for the publication of climate transition plans by listed companies, building on the work of the UK Transition Plan Taskforce (TPT), final transition plan disclosure framework expected to be published in October 2023.

IASB aims to improve reporting of climate-related in financial statements 

IASB has decided to explore targeted actions to improve the reporting of climate-related and other uncertainties in the financial statements, working closely with ISSB to facilitate connections in the boards’ work.. The possible actions include development of educational materials, illustrative examples and targeted amendments to IFRS Accounting Standards to improve application of existing requirements.

UK Research into connectivity of climate-related reporting

On 22 September, the UKEB published two reports arising from its Climate-related Matters Research Project:

• The ‘Climate-Related Matters: Summary of Connectivity Research’ provides an overview of recent third-party research into connectivity challenges between TCFD disclosures (a proxy for the disclosures required by IFRS S2) and the financial statements.
• ‘A Study in Connectivity: Analysis of 2022 UK Company Annual Reports’ which provides a deep-dive analysis from an investor’s perspective of potential connectivity challenges and includes stakeholder feedback on possible causes.

Both reports can be accessed on the UKEB Connectivity webpage, which includes links to the UKEB’s work on connectivity between sustainability related financial disclosures and financial reporting accounting standards. 

TNFD issues final recommendations

The Taskforce on Nature-related financial disclosures (TNFD) launched its final recommendations last month at New York Climate Week 2023, which are designed to meet the corporate reporting requirements of organisations and help them report and act on evolving nature-related issues, ultimately to assist a shift in global financial flows toward nature-positive outcomes. 

The TNFD disclosure framework includes conceptual foundations for nature-related disclosures, a set of general requirements, and a set of recommended disclosures structured around the four recommendation pillars (governance, strategy, risk and impact management, and metrics and targets), which is consistent with TCFD and should help enable integrated climate and nature reporting. They are also consistent with the sustainability reporting standards of the International Sustainability Standards Board (ISSB) and Global Reporting Initiative (GRI).  

The Taskforce has adapted the notion of Scopes 1, 2 and 3 in climate reporting to the nature context as ‘direct’ operations, ‘upstream’, ‘downstream’ and ‘financed’. The Taskforce has also released guidance on its proposed approach to the use of scenarios for nature-related issues.  

A4S has issued guidance to help organisations get ready for TNFD reporting, including:

• a Top Tips document for getting started; and
• a Maturity Map to assess where your organization currently stands.

EFRAG-GRI JOINT STATEMENT OF INTEROPERABILITY

GRI and EFRAG are pleased to confirm that they have achieved a high level of interoperability between their respective standards in relation to impact reporting.

GRI and EFRAG have published a joint statement on the high level of interoperability achieved between the European Sustainability Reporting Standards (ESRS) and the GRI Standards.

Following the requirement of the CSRD to adopt a double materiality approach and to take account of existing standards, ESRS and GRI definitions, concepts and disclosures regarding impacts are fully or, when full alignment was not possible due to the content of the CSRD mandate, closely aligned.

Existing GRI reporters will be well prepared to report under the ESRS. Entities reporting under ESRS are considered as reporting with reference to the GRI Standards and will therefore avoid the burden of multiple reporting.

EU Review of SFDR

EC has launched a far reaching review of SFDR, which could result in wholesale changes involving the introduction of a labelling mechanism and/or more precise definitions of the product categorisations. Two consultation papers (one public and one targeted) seek views on:

• the current requirements of the SFDR;
• the interaction with other sustainable finance legislation;
• potential changes to the disclosure requirements in the regime; and
• the potential establishment of a new categorisation or labelling system for financial products.

This could result in changes to the ESG disclosure obligations for funds sold in the EU, given industry concerns on the costs and difficulty of compliance with the current rules.

Independent GTAG Publishes Guidance on UK Green Taxonomy

The Green Technical Advisory Group (GTAG), which is guiding the UK government’s implementation of a UK Green Taxonomy, has issued detailed advice to HM Treasury to provide a roadmap for the UK Green Taxonomy. While it draws on many elements of the EU taxonomy, GTAG has stated that it has looked to adapt the UK Green Taxonomy to provide a “more effective reporting framework” for both disclosing businesses and investors within the UK context.

An initial voluntary ‘testing period’ for at least two reporting years is expected before the UK SDR/taxonomy reporting becomes mandatory, and GTAG recommend that a reporting template is issued to facilitate consistent disclosures and provide a comparable metric for investors which would then be road-tested during the two year ‘testing period’. It has issued the following:

• “Streamlining and increasing the usability of the DNSH criteria within the UK Green Taxonomy” which aimed to simplify the usability of the Do No Significant Harm (DNSH) criteria
• “Developing a UK Taxonomy Adapted to the UK’s Needs” which assesses short- and medium-term priorities for establishing a usable taxonomy
• “Getting KPIs Right: Implementing an Effective Reporting Regime for the UK Green Taxonomy” which outlines issues in European taxonomy reporting KPIs
• “Treatment of green financial products under an evolving UK Green Taxonomy” which reviews how the UK Green Taxonomy affects previously considered “green” activities, and
• “Operational considerations for taxonomy reporting” which provides recommendations for minimising data gaps in disclosures and guidance on the use of proxies.

These build on the GTAG’s Feb 2023 report on Promoting the international interoperability of a UK Green Taxonomy, as well as on GTAG recommendations in October 2022 regarding the practical implementation of the EU framework for onshoring.

International assurance standards for sustainability reporting

The International Auditing and Assurance Standards Board (IAASB) is consulting on the draft International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements.

Once finalized, ISSA 5000 will serve as a comprehensive, stand-alone standard suitable for limited and reasonable sustainability assurance engagements. It will apply to sustainability information reported across any sustainability topic and prepared under multiple frameworks. Moreover, the standard will be profession-agnostic, enabling its use by professional accountants and other professionals performing sustainability assurance engagements. Comments are due by 1^st Dec.

Diversity and inclusion across the financial sector

The FCA is consulting on proposals to introduce a new regulatory framework on diversity and inclusion (D&I) in the financial sector (CP23/20), with comments due by 18.12.23. The proposed framework seeks to establish minimum standards, greater consistency and transparency across the sector. The proposals include requirements to:

• develop a D&I strategy setting out how the firm will meet its objectives and goals;
• collect, report and disclose data against certain characteristics; and
• set targets to address under-representation.

This follows on from the FCA’s 2021 Consultation Paper on improving diversity and inclusion across the financial sector, after which the FCA  presented their findings on how financial services firms are designing and embedding diversity and inclusion (D&I) strategies and an overview of initiatives to improve D&I.  

A Policy statement on final rules is expected in 2024, with an implementation date of 12 months later.

SEC requires cybersecurity disclosures

On 26 July 2023, the SEC adopted rules requiring registrants to disclose material cybersecurity incidents and certain information regarding their cybersecurity risk management, strategy, and governance. Under the final rules, foreign private issuers (“FPIs“) will be required to furnish on Form 6-K information on material cybersecurity incidents that they disclose or otherwise publicize in a foreign jurisdiction, to any stock exchange, or to security holders. They will also be required in their annual report on Form 20-F to (i) describe the board of directors’ oversight of risks from cybersecurity threats and (ii) describe management’s role in assessing and managing material risks from cybersecurity threats. The SEC stated in the adopting release that “FPIs’ cybersecurity incidents and risks are not any less important to investors’ capital allocation than those of domestic registrants”.