Policy RoundUp - October 2024
Dear Member,
October has been busy for policy, with the Society commenting on the FCA’s ‘Prospectus’ proposals, raising issues around the materiality timeframe and quantification/assessment for proposed climate-related disclosure in prospectuses, and (in a separate response) supporting the transparency of pension fund investment in the UK’s unlisted quoted SME markets (AIM and Aquis) separately from unlisted equity, as this could help AIM company investor targeting.
The IR Society's recent survey of IR in the FTSE350 is also now available on our website. There is currently little consensus about how the value of IR, or the success of a company’s IR programme, can be measured and this survey, which we plan to repeat annually, will help to answer some of these questions. The findings from this first iteration are encouraging, with two thirds of respondents reporting that IR input is often included in senior management decisions, demonstrating that IR has become a strategic, two-way function.
The Autumn Budget saw business property relief only halved on AIM shares, rather than the full 40% IHT becoming payable as had been feared, causing AIM to rally but only time will tell whether this has a longer term impact on investor sentiment. This followed the report from ‘New Financial’ on the future of smaller company capital markets in the UK, outlining a vision to reverse their decline.
A recent court case is potentially very significant for investor claims under the UK’s statutory liability regime for issuers’ published information - if followed in future, it may restrict the ability of certain types of investor, such as tracker funds, to make such claims in relation to market information (other than in listing particulars/prospectuses).
The IoD released its Code of Conduct for Directors, and the Investment Association has substantially rewritten its Principles of Remuneration for 2025, which are significantly less prescriptive than before. With a simplified structure (three overarching Principles and Guidance) they emphasise the message that these are 'Principles, not rules', that investors will take a “case-by-case approach” to analyse the suitability of remuneration arrangements and that there is flexibility to adapt to what best suits a company’s business and strategy.
There have been various SEC cybersecurity disclosure enforcement actions, and nearer to home the government has promised an ambitious review of the Future of Corporate Reporting next year, alongside publishing some studies looking at the ‘Value of non-financial reporting (NFR) to investors’, which found that asset managers in the UK are estimated to be spending around £140M to £230M a year to use non-financial information in their investing activities, and that investors would like NFR to be better assured, more easily comparable across companies, and easier to use in the future.
A new task force has been set up for reporting of financially material 'social' issues (the Taskforce on Inequality and Social-related Financial Disclosures - TISFD), and COP16 brought us some discussion papers on nature reporting and nature transition planning, and we now have the final report from the Transition Plan Taskforce, as they are subsumed into the ISSB. Meanwhile, the FRC’s market study of ESG assurance has found that, while currently most UK companies reported having sufficient choice, some have concerns about choice and competition in the market in the future and raised possible issues around consistency in the quality of sustainability assurance services.
Looking ahead, Rachel Reeves’ first major speech to the UK’s financial services industry, the Mansion House Speech, on 14 November could provide more detail on potential reform for the UK capital markets.
Later in November we will be announcing the winners of our Best Practice Awards – this is a great opportunity to catch up with friends and colleagues and celebrate all your good work over the past year (all the details can be found here), and I look forward to seeing many of you there!
Best wishes,
Liz Cole
Head of Policy and Communications
Linked In
www.irsociety.org.uk
Society comments on the FCA’s ‘Prospectus’ proposals
The Society raised issues around the materiality timeframe and quantification/assessment for proposed climate-related disclosure in prospectuses.
Society comments on the FCA’s ‘Value for Money’ proposals
The Society supported the transparency of pension fund investment in the UK’s unlisted quoted SME markets (AIM and Aquis) separately from unlisted equity, as this could help AIM company investor targeting.
Attitudes to IR in the FTSE350 Survey Report
The IR Society's recent survey of IR in the FTSE350, conducted in partnership with ingage IR, is now available on our website. This investigates how the value of IR, or the success of a company’s IR programme, can be measured, and we plan to repeat this annually.
It is encouraging that, for two thirds of respondents, IR input is often included in senior management decisions, demonstrating that IR has predominantly become a strategic, two-way function and illustrating the professionalisation of the role. Over 80% of respondents felt that senior management fully supports and values the IR function, although this does not always translate directly to IR budgets!
Autumn Budget 2024
The first Budget for the new Labour Government saw business property relief halved on AIM shares that are held for two years, which will now be subject to IHT at 20%. AIM has rallied given it had been feared the full 40% would become payable, but this partial removal of the IHT exemption for AIM investment may have a longer term impact on investor sentiment.
The future of smaller company capital markets in the UK
On October 17, the thinktank ‘New Financial’ issued its report into the future of smaller company capital markets in the UK. This report argues that rebuilding a vibrant market for smaller listed companies is a vital part of the wider reform of UK capital markets to help drive long-term investment and growth. It paints a stark picture of the burning platform over the past few decades and how smaller companies have been hit harder than the wider market, highlights the unique role they play as a source of funding for UK plc, and outlines a vision to reverse their decline.
This report uses a broader definition than usual of ‘smaller companies’ and includes any UK listed company with a market capitalisation of less than £1bn. This is a deliberate decision to try to capture the dynamic of all smaller companies and to avoid getting too bogged down in a specific debate about AIM (which only accounts for a third of smaller listed companies by value). For the analysis of trends over the past 20 years, all market values are adjusted for inflation into 2023 money.
Many of the challenges facing smaller companies are common across the wider market: stemming the exodus of pensions from UK equities; re-engaging retail investors; resetting risk culture and the balance between risk, growth, and stability; or addressing governance and regulatory hurdles. But there is a world of difference between the issues facing a big tech company like Arm Holdings (valued at £110bn) it its decision to list in the US, and its smaller cousin Raspberry Pi (valued at £725m) which listed in London this year. And there is a world of difference between Raspberry Pi and a £75m tech company listed on AIM.
Smaller company capital markets provide a big source of funding for UK plc and help provide a funding escalator for the bigger companies of tomorrow: one third of listed UK companies with a market value of more than £2bn today have been a smaller company on our definition at some point in the past 20 years and have since more than doubled in value in real terms.
The future of smaller company capital markets in the UK (newfinancial.org)
'Investment Summit' promise for improving Secondary Capital raisings
Financial services was one of the 8 core growth-driving sectors highlighted in Invest 2035: the UK’s modern industrial strategy Green Paper published at the ‘Investment Summit’ in mid-October. Alongside this, the Government also announced its commitment to speed up the process for raising share capital. Labour’s pre-election “Financing Growth” paper had committed to implementing the outstanding recommendations from the 'Secondary Capital Raising Review', published in 2022. The changes will speed up and simplify the process for companies raising new share capital, for example by reducing from 10 to 7 working days the minimum time in which a company must offer new shares to existing shareholders before offering them to the wider market.
Written statements - Written questions, answers and statements - UK Parliament
Scaling Transition Finance: Findings of the Transition Finance Market Review
This report outlines a roadmap of policies, initiatives and pathways that can unlock significant capital to scale the market for transition finance in the UK and impacting globally. The Review, commissioned by the HM Treasury and Department for Energy Security and Net Zero, encourages stronger collaboration between Government, regulators and industry.
The full findings of the Review can be found here: theglobalcity.uk/PositiveWebsite/media/Research-reports/Scaling-Transition-Finance-Report.pdf
The FCA has responded, confirming that Transition finance remains a priority, with the FCA's objective being to support the market to scale with integrity, with the right standards and guardrails to help build trust. The FCA will:
- work with the Government on a new regime for ESG ratings providers, to further support integrity in transition-related ratings; and
- monitor market practices and raise standards, for example by consulting on strengthening our disclosure expectations, pending the Government’s endorsement of the ISSB standards (expected early 2025).
The FCA's full reaction is here: FCA responds to market review on delivering finance for global decarbonisation and UK growth | FCA
Tracker funds: Price/market reliance claims
A recent court case is potentially very significant for investor claims under the UK’s statutory liability regime for issuers’ published information (and s.90A/Sch.10A FSMA). Its approach, if followed in future, may restrict the ability of certain types of investor, such as tracker funds, to make such claims in relation to market information (other than in listing particulars/prospectuses).
The issues ruled upon by the judge carry great significance for the future shape of securities claims founded on Sch.10A. In particular, the position on price/market reliance and paragraph 3 is an issue which is likely to affect numerous claimants in such cases (for example, evidence provided by the claimants’ legal representative in the case estimated that, in 2020, around one third of the UK investment market comprised tracker funds whose investment processes could be described as “passive”). It may not, of course, be the last word; the judgment contains numerous references to the possibility of an appeal by the claimants. So developments in that space will be closely watched.
Read more in this Linklaters blog.
GOVERNANCE
The Institute of Directors' Code of Conduct for Directors
The Institute of Directors' Code of Conduct for Directors is a practical tool to help directors make better decisions. It also provides organisational leaders with a behavioural framework that can help them build and maintain the trust of the wider public in their business activities.
The Code will help directors navigate the complex trade-offs that they deal with every day. And it will support them in becoming respected leaders who do the right thing for their organisations.
The Code represents a voluntary commitment and is not intended to hold back directors or create a new burden of compliance. It is structured around six key ‘Principles of Director Conduct’:
- Leading by Example – demonstrating exemplary standards of behaviour in personal conduct and decision-making.
- Integrity – acting with honesty, adhering to strong ethical values, and doing the right thing.
- Transparency – communicating, acting and making decisions openly, honestly and clearly.
- Accountability – taking personal responsibility for actions and their consequences.
- Fairness – treating people equitably, without discrimination or bias.
- Responsible Business – integrating ethical and sustainable practices into business decisions, taking into account societal and environmental impacts.
The Code of Conduct was developed for the IoD by a Commission under the chairmanship of Lord McNicol of West Kilbride, and was published with the support of BDO. It was subject to an extensive public consultation exercise, with the Code receiving strong endorsement from the overwhelming majority of respondents.
IoD Code of Conduct for Directors | Institute of Directors
Investment Association updates Principles of Remuneration for 2025
The Investment Association has published its Principles of Remuneration for 2025.
Following an in-depth review, the 2025 Principles have been substantially rewritten and are significantly less prescriptive than before. There are several changes that listed companies should be aware of ahead of the 2025 AGM season, including:
- the 5% dilution limit applicable for discretionary share schemes, that capped the use of new issue or treasury shares over rolling 10-year periods, has been removed;
- the section on treatment of share awards on a change of control has been deleted;
- the IA confirms that it considers one times the annual LTIP award to be an appropriate benchmark for the minimum shareholding requirement; and
- it acknowledges that “hybrid schemes”, under which executives receive a combination of performance-based and service-based share awards, may be appropriate for some companies.
For more details on the revised Principles, see this HSF blog.
Acting on Audit - an investor stewardship perspective
This Railpen report is timely given the Draft Audit Reform and Corporate Governance Bill is currently going through Parliament, and explores audit from a stewardship perspective including:
- the evidence on the financial materiality of a high-quality audit to investors
- the policy and market landscape for audit in the US, UK and EU - and how it's evolving
- what investor stewards are currently doing on audit; and
- recommendations for investors, the audit profession, companies and policymakers to improve the market for a high-quality audit.
Issues and recommendations include:
- Insufficient information on assessment of quality of individual audit:
- Engagement-level Audit Quality Indicators (AQIs) should be published or shared with investors upon request UK Audit Committees,
- Audit Committees should agree up front with auditors which engagement-level metrics will be used to assess performance / suitability
- Need for more informative audit reporting to investors:
- Auditors should be required to produce and publish graduated findings in audit reports (in the interim, investors should ask for this information to be included in audit reports)
- Audit Committees should publish Resilience Statements and Audit and Assurance Policies (AAPs)
- Limited investor – issuer engagement on audit:
- Audit Committees should agree to all reasonable meeting requests from shareholders
- Audit partners should attend AGMs and answer shareholder questions
- Shareholders should flag their intention to ask the auditor a question in advance of the AGM
Read the report here: Acting on Audit.
CORPORATE REPORTING
SEC Cybersecurity Disclosure Enforcement Actions
This Linklaters blog outlines some key takeaways from Four Cybersecurity Disclosure Enforcement Actions in which the SEC has sent a clear message that it is scrutinizing corporate cybersecurity disclosures, and companies need to take their reporting obligations seriously. In a bold move, the agency recently settled four enforcement actions against U.S.-listed companies for allegedly misleading statements about cybersecurity incidents.
Key Takeaways from Four SEC Cybersecurity Disclosure Enforcement Actions | Linklaters
Non-financial Reporting Review
Jonathan Reynolds, the Secretary of State for Business and Trade has outlined the Government’s plans for corporate reporting reforms in a written statement to Parliament. Further consultation is promised in 2025 on the Future of Corporate Reporting to simplify and modernise the non-financial framework to better meet business and investor needs.
Efforts to modernise will also include examining the potential for updating shareholder communication in line with technology and clarifying the law in relation to virtual AGMs.
Some underlying reports were also published, including the "Value of non-financial reporting to investors" report that can be found here: https://www.gov.uk/government/publications/value-of-non-financial-reporting-to-investors. Key findings include:
- Non-financial information (NFI) often plays an important role in understanding risks and opportunities when investing in companies, regardless of the overall aims of that investor.
- Asset managers in the UK are estimated to be spending around £140 to £230 million a year to use NFI in their investing activities.
- The benefit of the current NFR regulations to UK investors is estimated to be in the range of £11 billion to £26 billion per year.
- Investors believe that the UK non-financial reporting regulations lead to more and better quality non-financial information being available.
- Investors would like NFR to be better assured, more easily comparable across companies, and easier to use in the future. These types of quality improvements could provide an added benefit of £6.6 billion to £17 billion a year.
- There is not currently universal demand from investors for provision of a greater volume of ESG information. However, it was observed in the interviews and consultations that some investors would value additional information being made available if material to decision making. This demand is variable based on investor preferences, with the types of information that matter most differing across investors.
Initial findings have been issued for the UK review of non-financial reporting and a link to the summary of responses to the call for evidence is available here.
Payment practices reporting – updated guidance and further measures to tackle late payments
The Department for Business and Trade has updated its guidance on the requirement for large UK companies to report on their payment practices, policies and performance. In-scope companies must produce a report every six months on their payment practices and submit the report to a government-hosted website for publication. The guidance contains detail on who needs to report, what needs to be reported and where the information needs to be reported and FAQs. The example reporting scenarios in the guidance have been updated to provide further clarity and assistance.
Further to the measures announced in September 2024 (see previous RoundUp), the Secretary for Business and Trade has confirmed in a written statement that:
- secondary legislation will be laid before July 2025 to require large companies to include information about their payment performance in their annual reports; and
- a consultation will be published on additional legislative measures to address late payments and long payment.
SUSTAINABILITY REPORTING
Swan song from Transition Plan Taskforce (TPT)
The final report of the UK Transition Plan Task force (which is now subsumed into the ISSB) was published on 31 October, which covers its achievements since it was established three years ago and looks ahead at the following four key areas for future collective efforts:
- Building market capabilities, practice and sharing experiences;
- Developing enabling tools and driving thought leadership;
- Ensuring that transition plans are integrated into decision-making;
- Increasing global consistency in transition planning norms and expectations.
Read the report: TPT concludes after completing groundbreaking work on Transition Plans
Taskforce on Inequality and Social-related Financial Disclosures (TISFD)
The recently launched Taskforce on Inequality and Social-related Financial Disclosures aims to bring clarity and consistency to the reporting and management of social-related matters. Developing a comprehensive disclosure framework will be complex but ensuring alignment and interoperability with existing standards such as the Global Reporting Initiative (GRI)'s, EFRAG's or International Sustainability Standards Board (ISSB)'s should drive efficiency and market adoption.
Taskforce on Inequality & Financial Disclosures | TISFD Global Initiative
Nature transition reporting
At COP16, TNFD published draft guidance on nature transition planning, which builds on the work of the Glasgow Financial Alliance for Net Zero (GFANZ) and Transition Plan Taskforce (TPT) - comments are due by 1 Feb 2025. This paper sets out draft guidance for corporates and financial institutions developing and disclosing a transition plan in line with the TNFD recommended disclosures. Key focus areas:
- A definition of a nature transition plan
- An overview of related initiatives
- Guidance on what a nature transition plan should include
- Guidance on how a plan should be presented and disclosed
- Areas of further work needed to support development and assessment of nature transition plans
By way of background, the Global Biodiversity Framework (GBF) was an historic agreement adopted by 196 countries at COP15 in December 2022. The GBF outlines an ambitious roadmap to halt and reverse nature loss by 2030 and live in harmony with nature by 2050, and is supported by 23 targets for 2030 and four goals for 2050.
Delivering the transition implied by the GBF will require significant changes to business practices across all sectors. Investors, regulators and other stakeholders are also increasingly demanding that corporates and financial institutions demonstrate proactive strategies to manage their nature-related dependencies, impacts, risks and opportunities. Transition planning offers a way to manage an organisation’s responses and contributions to the transition implied by the GBF in a coherent, structured way.
Discussion paper on nature transition plans – TNFD
TNFD nature-related data initiatives
Application of geospatial data can improve the ability of key financial actors to differentiate on environmental performance, and to aid realignment of capital towards truly sustainable development. WWF's ‘Geospatial ESG’ is the emerging application of geospatial data for gaining ‘environmental’ insights for investors at the asset, corporate and sovereign level. This work integrates into the WWF’s Nature Data Public Facility (NDPF) initiative and proposed ongoing programme of work to facilitate nature-related data for markets.
“We are delighted to deepen our long-term collaboration with WWF, one of our founding organisations, to help meet the growing nature-related data needs of the market. Today’s announcement underscores the need for organisations right across the nature data value chain – from primary data collectors to end users – to come together to improve the quality, timeliness and decision usefulness of nature-related data.” - Catherine Armour, Director of Data Initiatives.
At COP16, TNFD released the blueprint and development roadmap for the NDPF:
A roadmap for upgrading market access to decision-useful nature-related data – TNFD. Key focus areas:
- The fast emergence of corporate reporting architecture and the introduction of mandatory climate- and nature-related reporting standards in Europe, China and elsewhere.
- Three new demand signals from the private sector for nature-related data.
- A proposed roadmap for further action.
- 10 proposed data principles. 5. Understanding the requirements of a Nature Data Public Facility.
Comments are due by 17 Jan 2025.
ESG Assurance
Following the FRC market study into assurance of sustainability reporting earlier this year (see June’s RoundUp for the Society response), the FRC has published emerging findings that provide insights into the developing market, including data on the use of sustainability assurance in the FTSE 350.
The study found that while currently most UK companies reported having sufficient choice of provider of assurance, some raised concerns that the market may begin to consolidate around the largest UK audit firms. Some respondents expressed fears that this may limit choice and effective competition in the market in the future. Beyond this, many stakeholders highlighted possible issues around consistency in the quality of sustainability assurance services.
Assurance of Sustainability Reporting Market Study
Investors turn to AI for ESG data challenges
The latest report from Capital Group on global investor ESG perspectives found that, while only 10% of respondents currently use AI for ESG analysis, over half plan to adopt it.
AI
‘Careful what you say’
Emma Burdett has written a very useful blog outlining the use and implications of tech and AI for corporate reporting and Investor Relations, asking will it help or hinder transparency and proper engagement?