Policy RoundUp - August/September 2024

Icole
Policy RoundUp 1.0 IR Programme, Strategy & Implementation

Dear Member,

Welcome back to our Policy RoundUp now that Summer appears to be well and truly over!

At market opening for the new 'ESCC' main market in early September, Tulip Siddiq MP (City Minister) set out the government’s vision for the future of UK capital markets.

The new government is promising more measures aimed at improving the attractiveness of the London markets, including a review of how UK pension fund investment could boost UK capital markets. Its first call for evidence, issued in September, examined pension fund investment and the role of pension funds in capital and financial markets to boost returns and UK growth.

In a related initiative, the FCA is consulting on the ‘Value for Money’ framework for pension funds, proposing the mandatory disclosure of sub-asset classes including types of listed and private equities, as well as the split between listed / unlisted assets and UK / non-UK assets. This increased transparency will allow analysts (and policymakers) to monitor how much firms are investing in the UK economy, and also support the FCA’s secondary growth and competitiveness objective. The current proposals would bundle AIM-traded companies with unlisted equities, but the FCA is seeking feedback on the potential benefits and costs of disclosing such ‘quoted but not listed’ assets separately.

The new Listing Regime is now bedding in, with its relaxed rules on transactions and governance, with disclosure replacing shareholder approvals for significant and related party transactions. Investor relations teams will therefore need to update their disclosure processes, for example announcement templates, and engage with shareholders to explain transaction rationales and governance structures, especially if there is a dual-class share structure or controlling shareholder.

In the wake of the new Listing Regime, the FCA is consulting on a revised ‘public offers and admissions to trading’ regime to improve the attractiveness of the UK’s capital markets. The Society will be responding to support their proposal to (significantly) raise mandatory prospectus threshold for further issuances as this will facilitate rights issues and reduce associated costs. We also support the new liability safe harbour for ‘Protected forward looking statements’ (PFLS), as this should improve profit forecasting in prospectuses and thus better inform valuation and pricing.

The proposal for mandatory inclusion in prospectuses of material climate-related risks and opportunities raises various possible issues around materiality, for example, what timeframes should be considered, and there could be other implications around the practicalities/costs of the increased due diligence and legal/sponsor sign off, especially where there is uncertainty eg disclosures rely on technology that is not yet available.

Prospectuses are mentioned again in the FRC/FCA discussion paper on ‘What’s next for UK Digital Reporting?’ which envisages tagging of financial information in prospectuses. By way of background, whilst this discussion paper examines possible alternative taxonomies and assurance of digital tagging of the financial statements, it also explores mandatory tagging of sustainability disclosure within annual reports, and of other types of regulatory market disclosures outside the ARA (eg prospectuses, interim financials and wider regulatory/DTR/LR/MAR disclosures). Increasing the scope of digital tagging could bring potential benefits in terms of improving the comparability and accessibility of reported data, but we have some concerns around the impact on costs, process and timetable for filing ARAs. Our discussions so far seem to suggest that introducing mandatory disclosure and tagging of sustainability reporting would necessitate the adoption of a “disclosure management system”, which would be a significant annual cost for mid- and small-caps. However, once that cost has been incurred, this could then make tagging of wider regulatory disclosure much more straightforward. The UK’s choice of tagging system may also have an impact on IR, as it will allow more comparability and consistency either within the UK or globally.

The FRC’s latest annual review of corporate reporting found a widening gap in quality between those within and outside the FTSE 350. In relation to sustainability reporting, there were comparatively few compliance issues in premium-listed companies’ reporting against the Taskforce for Climate-related Financial Disclosures (TCFD) framework.

Meanwhile, the FRC is consulting on its Going Concern Guidance, seeking views on the scope of the guidance which encourages directors to take a broader view, over a longer term, of the risks and uncertainties that goes beyond the specific requirements in accounting standards and includes non-financial and longer term (eg sustainability-related, supply chain, geopolitical, cybersecurity etc) risks.

The Government is also pushing ahead with a requirement for large companies to report on their 'payment practices' in their annual reports, to increase transparency around their treatment of smaller businesses in their supply chain.

The FRC’s latest review of the application by large private companies of the Wates Corporate Governance Principles called for more company-specific disclosure and outcomes-based reporting.

The IASB is consulting on guidance for disclosure of Climate-related and Other Uncertainties in the Financial Statements to help improve clarity and connectivity, responding to investor concerns that information about climate-related risks in the financial statements is sometimes insufficient or appears inconsistent with other information reported by companies. Investors have always sought out companies that convey a coherent story to the market, which helps them build confidence in management, in companies and, ultimately, in their own investment case. The illustrative examples are designed to help improve reporting of the effects of climate-related and other uncertainties in the financial statements, and to strengthen connections between a company’s financial statements, sustainability-related disclosures and other general purpose financial reports.

Various guidance has been issued to assist with wider sustainability reporting, including a new guide for those voluntarily applying the ISSB Standards and GRI FAQs on interaction with (EU) ESRS and ISSB standards.

September’s Capital Markets Industry Taskforce (CMIT) conference saw the launch of the newly formed ‘Investor and Issuer Forum’ (I&IF), which builds on the Society’s ongoing dialogue with the Investor Forum and we look forward to working closely with the I&IF going forward.

Meanwhile, we are busy short-listing our Best Practice Awards, and we look forward to seeing many of you at our Awards Dinner on 26 November (all the details can be found here).

Best wishes,

Liz Cole
Head of Policy and Communications
Linked In
www.irsociety.org.uk

 

The new government’s vision for the future of UK capital markets

On 6 September, many gathered at market opening to celebrate the launch of the new London Stock Exchange Main Market (the ESCC), which forms part of the most significant listing reforms to the UK's Listing Rules in a generation. The new rules came into effect in late July 2024 and include new ways for companies to raise money in the UK, new ways of carrying out mergers and acquisitions and new ways of investing in the UK’s capital markets. City Minister and Economic Secretary to the Treasury , Tulip Siddiq MP, set out the new government’s vision for the future of the UK capital markets, highlighting the vital role our capital markets play in the UK economy.

Launch of the new ‘Investor & Issuer Forum’

The Market Open also marked the start of the second annual Capital Markets Industry Taskforce (CMIT) conference, at which the Investor & Issuer Forum (I&IF) was formally launched. This follows the dialogues between the Investor Forum and various strategic partners (including the Society) over the past year, which aimed to enhance the effectiveness of the UK equity markets through focused, actionable initiatives.

The I&IF brings investors and companies together to drive conversations around long-term value creation and enhance the effectiveness of UK capital markets with a clear focus on sustainable value creation. In particular, it aims to:

  • Surface Ideas: actively seek out and highlight innovative ideas that can improve UK capital markets.
  • Gather Feedback: draw insights from a wide range of market participants.
  • Undertake and Commission Research to uncover actionable solutions.
  • Identify Practical Steps: implement tangible actions that make a difference to market practitioners.

Pensions Investment Review

The Chancellor has launched a landmark pensions review to boost investment, increase saver returns and tackle waste in the pensions system. The first phase of the review will focus on investment by defined contribution (DC) workplace schemes and the Local Government Pension Scheme (LGPS), and report initial findings later this year and ahead of the introduction of the Pension Schemes Bill.

Its first call for evidence earlier this month sought evidence on a range of topics including ‘Investing in the UK’, examining questions like:

  • What is the potential for a more consolidated LGPS and workplace DC market, combined with an increased focus on net investment returns (rather than costs), to increase net investment in UK asset classes such as unlisted and listed equity and infrastructure, and the potential impacts of such an increase on UK growth?
  • What are the main factors behind changing patterns of UK pension fund investment in UK asset classes (including UK-listed equities), such as past and predicted asset price performance and cost factors?
  • Is there a case for establishing additional incentives or requirements aimed at raising the portfolio allocations of DC and LGPS funds to UK assets or particular UK asset classes, taking into account the priorities of the review to improve saver outcomes and boost UK growth?

The Pensions Investment Review will also examine the progress already made on in-train policy initiatives such as the ‘Value for Money’ framework for pension funds.

Pensions ‘Value for Money’ framework

The FCA is consulting on this framework to drive long-term value for workplace pension savers, designed to shift the focus from costs to long-term value by providing greater transparency over how schemes are performing.

Schemes will be compared on public metrics that demonstrate value – not just costs and charges, but also investment performance and service quality. The proposals will also support the FCA’s secondary growth and competitiveness objective. An effective Value for Money framework will also lay the foundations for the government’s Pensions Investment Review (see above) and the upcoming Pension Bill.

The FCA is proposing the mandatory disclosure of several sub-asset classes including different bond types, types of listed and private equities, as well as the split between listed / unlisted assets and UK / non-UK assets. This increased transparency will also allow policymakers and analysts to monitor how much firms are investing in the UK economy.

‘UK Assets’

For listed investments, ‘UK assets’ would include all those with a primary listing on a UK market and constituents of UK market indices. Where investment is via a pooled fund, the proposed measure is UK allocation within the fund and would include, for example, UK market exposure within global equity funds.

‘Listed assets’

Listed assets for the purpose of these disclosures would be those admitted to trading on a regulated market (ie would exclude AIM-traded companies, which would instead be categorised as unlisted, but has requested feedback on the potential benefits and costs of disclosing ‘quoted but not listed’ assets separately, such as AIM-traded shares and certain corporate bond investments). The FCA also proposes mandating additional disclosure of anything material to investment performance, including the extent to which listed equities are focussed on small/large cap stocks and any hedging or use of derivatives.

Consultation Paper 24/16: Value for Money Framework closes on 17 October 2024.

New 'public offers and admissions to trading' regime (Prospectuses)

As reported in July’s RoundUp, the FCA has set out various measures designed to help strengthen the UK’s capital markets. Key to the package are proposed rules to establish the new Prospectus Rules: Admission to Trading on a Regulated Market sourcebook (PRM), which will replace the existing UK Prospectus Regulation Rules.

Under the proposals, companies will still be required to publish a prospectus when first admitting securities to public markets. However, a prospectus would not be required when a company raises further capital except in limited circumstances. The FCA's aims are to reduce the costs of listing on UK markets, make capital raising easier on UK listed markets and remove barriers to retail participation.

The proposals involve changing the rules regarding admissions of securities to UK regulated markets by creating a new Prospectus Rules: Admission to Trading on a Regulated Market sourcebook (PRM) and removing the Prospectus Regulation Rules (PRR).

The key changes include:

  • increasing the threshold for triggering a prospectus for further issuances from 20% to 75% (though companies would still be allowed to produce a voluntary prospectus approved by the FCA for issues below this threshold);
  • where a company has identified climate-related risks as risk factors or climate-related opportunities as material to its prospects, the rules would require certain climate-related disclosures to be included in a prospectus. This proposed new requirement may be complemented by further guidance; and
  • Providing a clear framework to give companies legal certainty on what information constitutes protected forward looking statements (PFLS), which will be subject to an amended statutory liability threshold, and to ensure investors can identify and assess such content. (The FCA proposes that issuer liability for forward-looking information (eg profit forecasts) in a prospectus will only be incurred when those involved knew, or were reckless as to whether, the statement was false or misleading, or if they knowingly omitted a material fact.)

This Baker McKensie blog provides more detailed information on the proposed changes. The consultation (CP24/12) closes on 18th October, and the FCA aims to finalise the new rules by the end of H1 2025.

Public offer platforms (POPs)

As reported in July’s RoundUp, the FCA is also consulting on proposals for a new activity of operating a public offer platform (closing 18th October). These platforms will offer an alternative route for companies to raise capital outside public markets including from retail investors. The introduction of the platforms should promote scale-up capital raising for smaller companies while ensuring that investors get the right disclosures on the key terms and risks of an investment.

This Macfarlanes blog provides more detailed information on the POP proposals, including disclosure and verification/due diligence requirements.

Payment practices disclosure in annual reports

The Government has announced that legislation will be made "in the coming weeks" requiring large companies to include payment reporting in their annual reports. This increased transparency will allow investors to see how large corporates are treating smaller businesses in their supply chain. This is part of a new package of measures to deal with late payments including:

  • the launch of a new Fair Payment Code – with bronze, silver and gold standards – to replace the current Prompt Payment Code. Businesses which can prove that they have met good payment standards will be able to sign up to the new code from the autumn; 
  • a consultation on the role of audit and audit committees in relation to payment practices; and
  • plans for stricter enforcement of the payment practices reporting regulations. 

What's next for UK Digital Reporting?

A comprehensive discussion paper was issued in August by various regulators (including the FRC and FCA) on the future of digital reporting in the UK, which aims to gather stakeholder feedback on the scope and extent of digital reporting requirements, alternative taxonomies, potential changes or extensions to structured digital reporting to support regulatory disclosure initiatives, assurance of digital reports, renaming the UKSEF, the impact of a full tagging mandate, and existing/potential guidance materials.

Existing tagging requirements – moving away from the ESEF taxonomy for DTR purposes?  

As mentioned in the introduction above, this discussion paper examines possible alternative taxonomies and assurance of digital tagging. The consultation considers replacing the EU ‘ESEF’ taxonomy (which is based on the IFRS Foundation’s taxonomy) because the UK has no influence over the ESEF or over the timeliness of updates, and it may diverge over time from UK/FCA policy for corporate digital reporting and potential further expansion in other areas, such as sustainability reporting, creating friction/ incompatibility.

The UK’s choice of tagging system may also have an impact on IR, as it will allow more comparability and consistency either within the UK or globally. Alternative taxonomies include:

  • the IFRS Foundation taxonomy (directly), which would facilitate broader international comparability and consistency,
  • the IFRS Foundation taxonomy (via a new UK version), as above but with the FCA adding UK ‘top-up’ requirements, or
  • the FRC’s existing UK-IFRS taxonomy – which is presented in the order of an annual report and tailored to the UK's specific reporting environment with synergies with other UK reporting reqts (eg HMRC/Companies Hse), and is more granular/prescriptive and does not permit extensions and anchors, meaning more consistency and comparability within the UK, but less international comparability and consistency. 

The paper also explores mandatory tagging of sustainability disclosure within annual reports and of other types of regulatory market disclosures outside the ARA (eg prospectuses, interim financials and wider regulatory/DTR/LR/MAR disclosures). Our discussions so far seem to suggest that introducing mandatory disclosure and tagging of sustainability reporting will necessitate the adoption of a “disclosure management system”, which would be a significant annual cost for mid- and small-caps. However, once that cost has been incurred, this could then make tagging of wider regulatory disclosure much more straightforward. 

The consultation closes on 01.11.24, and see also (further below) the taxonomy for the first set of sector agnostic EU sustainability reporting standards (ESRS digital taxonomy).

EY Guidance on new Internal Controls Declaration

EY has issued guidance on how directors and senior management can approach the material controls effectiveness declaration under Provision 29 of the 2024 UK Corporate Governance Code. These declarations become mandatory from January 2026, and this EY guidance outlines the changes that may be needed to i. underlying processes and ii. disclosures.  It also contains examples from EY’s analysis of 100+ FTSE 350 annual reports.

Latest Review of Private Company Reporting against the Wates Principles

The FRC has published its second review of the application of the Wates Corporate Governance Principles by large private companies, calling for more company-specific disclosure and outcomes-based reporting. The report (issued in conjunction with the University of Essex) shows that in-scope companies can still have difficulty with defining their company purpose, connecting that purpose to strategy, culture and values, and explaining how stakeholder engagement affects board decision-making.

FRC consults on Going Concern Guidance 

In August, the FRC published some proposed revised guidance to help companies disclose principal risks and uncertainties within their strategic report, which may include risks that might impact solvency and liquidity.

The draft Guidance is intended to help companies prepare high-quality, company-specific disclosures about their going concern conclusions and how they were reached. This should allow investors to understand a company’s exposure to and plans to navigate solvency and liquidity risks.

The FRC is seeking views on the scope of the guidance, how directors approach the assessment process when considering the appropriateness of adopting a going concern basis of reporting, and whether the guidance is proportionate.

The guidance encourages directors to take a broader view, over a longer term, of the risks and uncertainties that goes beyond the specific requirements in accounting standards.

The decision as to which non-financial and longer term (eg sustainability-related, supply chain, geopolitical, cybersecurity etc) risks are included within the strategic report is left to the board’s judgment (along with the time horizons thereof). The draft guidance mentions that companies facing greater uncertainty or longer-term time horizons could consider complex techniques such as scenario analysis and reverse stress testing.

Compliance with the guidance is not mandatory but it aims to be of practical help when reporting on a going concern basis. It brings together the requirements from various sources, including company law, the UKLRs, the UK Corporate Governance Code and accounting standards.

The consultation closes on 28 October 2024, and the FRC expects to publish finalised guidance by 20.1.25, which will be available for use immediately (although the implementation dates for the various requirements to which it relates vary).

FRC Annual Review of Corporate Reporting

The FRC’s latest annual review has found that, overall, the quality of reporting in the FTSE 350 has been maintained, and that there have been improvements in some areas. However, the increase restatements outside the FTSE 350 is evidence of a widening gap in quality. 

In relation to sustainability reporting, there were comparatively few compliance issues in premium-listed companies’ reporting against the Taskforce for Climate-related Financial Disclosures (TCFD) framework.

The FRC is hosting a webinar on 17 October to discuss the key findings.

Climate-related and Other Uncertainties in the Financial Statements

The IASB is consulting on draft guidance and illustrative examples that aim to improve the reporting of climate-related and other uncertainties in financial statements, to maintain close alignment and connectivity between financial and sustainability reporting so that the information produced for investors is compatible and comparable.  Comments are due by 28th November, and the UKEB is also consulting on its own draft submission (comments due 11th November), which recognises the challenges of delivering guidance as sustainability reporting continues to evolve. The UKEB commends the IASB for its work to help provide clarity regarding connectivity and welcomes the IASB’s development of the illustrative examples.

The eight examples are listed below for information and further detailed in the IASB Exposure Draft:

  • Example 1—Materiality judgements leading to additional disclosures (IAS 1/IFRS 18)
  • Example 2—Materiality judgements not leading to additional disclosures (IAS 1/IFRS 18)
  • Example 3—Disclosure of assumptions: specific requirements (IAS 36)
  • Example 4—Disclosure of assumptions: general requirements (IAS 1/IAS 8)
  • Example 5—Disclosure of assumptions: additional disclosures (IAS 1/IFRS 18)
  • Example 6—Disclosure about credit risk (IFRS 7)
  • Example 7—Disclosure about decommissioning and restoration provisions (IAS 37)
  • Example 8—Disclosure of disaggregated information (IFRS 18)

For more information, the IASB has published a Webcast: Exposure Draft Climate-related and Other Uncertainties in the Financial Statements.

New guide for voluntary application of ISSB Standards

To help companies meet investor demands for voluntary disclosure of decision-useful, globally comparable sustainability information, the ISSB has published Voluntarily applying ISSB Standards—A guide for preparers. The guide also aims to help companies communicate their progress to investors, and used in tandem with tools such as the ESRS—ISSB Standards Interoperability Guidance to meet investor demand and regulatory requirements around the world.

PWC Viewpoint: Global sustainability reporting guide

PwC has published an inaugural edition of its Sustainability reporting guide (SRG). This guide serves as a compendium of the reporting requirements under the sustainability frameworks expected to have the broadest impact globally, including: 

  • European Sustainability Reporting Standards (ESRS) for reporting under the Corporate Sustainability Reporting Directive (CSRD)
  • IFRS® Sustainability Disclosure Standards issued by the ISSB, and
  • Climate disclosure rules issued by the SEC.

California has also issued several laws that will require sustainability disclosures from a broad range of public and private companies, including US subsidiaries of non-US entities. In addition, the guide has chapters dedicated to GHG emissions reporting as well as an introduction to the EU Taxonomy Regulation. The guide provides PwC’s insights and perspectives, interpretive and application guidance, illustrative examples, and discussion on emerging practices. It should be used in combination with a thorough analysis of the relevant facts and circumstances, review of the authoritative sustainability guidance, and appropriate professional and technical advice.

ESRS digital taxonomy (XBRL)

EFRAG, the European Financial Reporting Advisory Group, has achieved an important milestone by issuing eXtensible Business Reporting Language (XRBL) taxonomy the first set of sector agnostic EU sustainability reporting standards (ESRSs). XRBL is a global framework for digitally exchanging business information. The taxonomy will now be used by ESMA, the European Securities and Markets Authority, to develop technical standards for the tagging of sustainability reports in a machine-readable format for companies when disclosing pursuant to the ESRS.

GRI - FAQs on interaction with (EU) ESRS and ISSB standards, MoU with IFVI and report on social sustainability performance

The Global Reporting Initiative (GRI) has published some FAQs for GRI preparers and users on alignment and interoperability with the new European Sustainably Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD), and wider covers the ISSB global standards. The FAQs include links to various resources – including an interoperability index and data mapping table, training courses and report services – to help GRI reporters meet CSRD rules, and explain how the GRI Standards, ESRS and ISSB Standards fit together, including the different approaches to materiality. The GRI has also issued a Top 10 Summary of the FAQs.

Key takeaways include:

  • There is no need to perform multiple materiality assessments if you are reporting against ESRS, GRI or ISSB. The CSRD has a double materiality perspective, requiring companies to report on risks and opportunities for the business and impacts on the wider world. The GRI Standards address impact materiality on sustainability issues to meet the needs of all stakeholders, and EFRAG have adopted the same definition for impact materiality as the GRI. The ISSB standards focus on financially material information for investors. A double materiality assessment of both impact and financial materiality under CSRD would therefore also satisfy the ISSB focus on financial materiality.
  • The risk of double reporting for the different standards is actively being mitigated. Interoperability between GRI and the ESRS prevents the need for double reporting and supports a user-friendly reporting system. Companies can leverage their existing GRI reporting processes and practices to meet and complement requirements under the CSRD so that companies only have to collect data once (based on the GRI Standards) and use it for multiple disclosure needs.
  • The work to create aligned digital taxonomies will further streamline GRI and ESRS reporting effort. Digital tagging for sustainability information is fast approaching and GRI and EFRAG are collaborating in the development of XBRL digital taxonomies for their respective standards. GRI has committed to providing a digital correspondence table that will link data points between both standards, to support companies to file their reports and leverage the data collection already in place for their GRI based report.
  • Assurance is wide-spread among the major sustainability Standards and will only get more stringent. The CSRD introduces mandatory ‘limited assurance’ with increased requirements intended to come later, with ‘reasonable assurance’ requirements from 2028. GRI is subject to external assurance more often than that of any other sustainability reporting framework, which offers further confirmation that reporting data using the GRI Standards will support companies in meeting their ESRS disclosure needs.

The GRI have also signed an MoU with IFVI on ‘Understanding impact’, to collaborate and advance the application and measurement of corporate impacts. The International Foundation for Valuing Impacts (IFVI), launched in 2022, builds on the frameworks and protocols of GRI and existing standard-setters to develop the next level of sustainability information – the monetary valuation of impacts, also called impact accounting.

Together, GRI and IFVI aim to make sustainability data as accessible, actionable and comparable as financial data. Unlocking open access to sustainability data will empower companies, investors and other stakeholders to strengthen transparency in the supply chain, driving informed decision-making towards a more sustainable future.

Finally, the GRI Academy have published a new report on social sustainability performance, in partnership with the World Benchmarking Alliance (WBA).  This report establishes a direct correlation between the use of the GRI Standards for reporting and a stronger corporate social performance, based on rankings using WBA's Social Benchmark and Core Social Indicators.