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Society comments on the Future of UK Digital Tagging

The Society would support a system based on the IFRS Foundation taxonomy, to promote the international consistency and comparability of annual financial statements and thus help attract international issuers, dual listings and global investors/capital. Any mandatory reporting and tagging of sustainability-related data would impact on costs, process and timetable for filing ARAs and thus should be phased in over time, starting with the largest caps, to enable the development of software solutions/best practice. Moreover, the cost of introducing ‘disclosure management systems’ to comply with any mandatory sustainability reporting would currently be very significant for small- and mid-cap companies.

The Investor Relations Society

Suite 717, 70 Gracechurch Street

London, EC3V 0HR

Phil Fitz-Gerald

Digital Reporting and Taxonomies Team

Financial Reporting Council

8th Floor, 125 London Wall

London, EC2Y 5AS

By email: XBRL@frc.org.uk

 

14th November 2024

 

Dear Phil,

Re: Discussion Paper: Opportunities for the future of digital reporting

Thank you for giving us the opportunity to comment on the Discussion Paper: Opportunities for the future of digital reporting. This response is made on behalf of the UK’s Investor Relations Society (‘the IR Society’).

The IR Society represents Members working for publicly listed companies and investor relations focused service providers, to assist them in the development of effective two-way communication with the markets. It has approaching 800 Members, drawn mainly from the UK, including the majority of the UK FTSE 100 and many of the FTSE 250 constituents and some from companies listed overseas.

The IR Society’s mission is to promote best practice in investor relations; to support the professional development of its Members; to represent their views to regulatory bodies, the investment community and Government; and to act as a forum for issuers and the investment community. As such, our response has been primarily constructed through the lens of a corporate issuer.

We have not answered all the specific questions, but we set out below our general comments on the aspects of most relevance to our members, which relate to the possible alternatives to the ESEF taxonomy, and what new types of information within and beyond the annual report should be prioritised for tagging.

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

Context

The discussion paper considers replacing the EU ‘ESEF’ taxonomy for digitally tagged financial statements filed with the National Storage Mechanism (NSM) because the UK has no influence over the ESEF or over the timeliness of its 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 and incompatibility.

Alternative taxonomies include:

  1. the IFRS Foundation taxonomy (directly), which would facilitate broader international comparability and consistency,
  2. the IFRS Foundation taxonomy (via a new UK version), as above but with the FCA adding UK ‘top-up’ requirements, or
  3. 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 requirements (eg HMRC/Companies House), and is more granular/prescriptive in that it does not permit extensions and anchors, meaning more consistency and comparability within the UK.

IR Society comments

The Society would support the UK adopting the global/IFRS Foundation taxonomy (option a), or possibly a new UK version based on it (option b, above), rather than using the FRC’s existing UK-IFRS taxonomy (option c above) because, in our view, keeping with a system based on the IFRS Foundation taxonomy would promote the international consistency and comparability of annual financial statements and thus help attract international issuers, dual listings and global investors/capital, and improve access to green finance for UK issuers.

Furthermore, given the EU ‘ESEF’ taxonomy is based on the IFRS Foundation’s taxonomy, moving to a system based on the IFRS taxonomy would also minimise the regulatory change for preparers and thus the associated costs for issuers currently subject to FCA rules that are based on the ESEF (compared with adopting the FRC’s existing UK-IFRS taxonomy for DTR purposes, ie option c above).

In principle, these benefits would be more significant if the UK adopted the global/IFRS Foundation taxonomy (option a), rather than a new UK version based on it (option b). However, the question of whether this should be the IFRS taxonomy directly or with UK adaptations may become less clear cut if in the future a requirement for tagging of ESG disclosures is brought in (see below), given that the increased complexity and granularity of ESG reporting would likely result in issuers having to implement ‘disclosure management systems’ that will have tagging embedded within them, rather than the current system in which issuers often send their financial statements to third party service providers for tagging after they have been prepared. If UK ‘top ups’ are felt to be necessary for the UK regulators to support their regulatory disclosure initiatives, such ‘disclosure management systems’ may be able to mitigate the potential drawbacks (ie impact on international comparability/consistency), but any such UK top ups should be consulted on further in due course, and they should not be introduced unless/until cost effective technology solutions are readily available to mitigate the implementation and ongoing costs for issuers.

What new types of (non-financial) information within the annual report should be prioritised for tagging, and why?

Context

The discussion paper explores mandatory tagging of sustainability disclosure within annual reports, including non-financial information relating to:

  • Diversity and inclusion information; and
  • Other Sustainability reporting, including UK-endorsed ISSB standards, subject to any future FCA consultation on such rule changes to incorporate these standards.

The FRC’s initial goal is for the majority of possible disclosures to be provided for in the Taxonomy Suite. For example, SECR, TCFD, Gender Pay Gap, Pay Ratio, and D&I tags are all available in the taxonomies but not widely used. Further mandatory tagging is expected in the area of sustainability data, possibly using the ISSB taxonomy or a UK-endorsed version.

IR Society comments

The Society acknowledges that:

  • the direction of travel is towards the tagging of sustainability data; it is mandatory under the EU CSRD, and the ISSB has finalised its taxonomy so this would be available if the FCA decides to adopt UK reporting standards based on IFRS S1 and S2, and
  • increasing the scope of digital tagging could bring potential benefits in terms of  improving comparability and accessibility of reported data.

However, the Society has some concerns around the likely impact on costs, process and timetable for filing ARAs if mandatory sustainability-related disclosure and tagging are brought in. For instance, currently, tagging of the financial statements is often done separately by a third party provider after the ARA has been finalised. We understand that a significant minority of companies have been missing the NSM filing deadline for their tagged annual reports, and we anticipate this would be greatly exacerbated by any mandatory reporting and tagging of sustainability information.

We acknowledge that these issues could be mitigated by the adoption of ‘disclosure management systems’. However, such systems would be a significant annual cost for small- and mid-caps, and therefore in our view it is important that any implementation of mandatory reporting/tagging for non-financial reporting should be phased in over time, starting with the largest caps, to enable the development of software solutions/best practice. In due course, there would also need to be guidance/ support available for mid- and small-caps, with examples of best practice, to help them mitigate the cost and resource implications of any mandatory tagging of non-financial data.

What new types of information beyond the annual report should be prioritised for tagging, and why?

Context

The discussion paper mentions that possible further areas to expand tagging beyond the Annual Report and Accounts (ARA) could include tagging of interim financial information, prospectus financial information, and other sources of regulated information required by FCA Listing Rules, DTRs or the UK Market Abuse Regulation.

IR Society comments

If tagging is brought in for other regulatory reports, the Society has some concerns around the potential impact on costs, process and timing of filing.

The Society acknowledges that, if issuers move towards having ‘disclosure management systems’ (as mentioned above), this could facilitate the tagging of other regulatory disclosures and mitigate the associated cost, resource and timing implications, but we note above that the cost of such ‘disclosure management systems’ would currently be very significant for small- and mid-cap companies.

However, subject to the caveats outlined below, and provided implementation was phased in after affordable technology solutions and best practice examples are available, if the required tagging can facilitate data analysis by investors/analysts then the Society has no objections to this direction of travel.

Our caveats are that:

  • in our view, any such tagging requirements beyond the ARA should, at least initially, be limited to financial reporting (eg interim financial statements), and
  • tagging of any non-financial disclosure should be phased in later, after both the financial tagging of regulatory disclosures and the tagging of non-financial information within ARAs has bedded in. We would suggest any such non-financial tagging requirements beyond the ARA should not be introduced for a period of 18 months to two years following the publication of relevant finalised UK sustainability reporting standards, to allow sufficient time for technology solutions to become available at a reasonable cost for the tagging of any such non-financial reporting, and to allow early adopters to develop some best practice examples.

We also note that the UK’s NSM already includes some limited categorisation capabilities when uploading and searching for filings/reports, including document description (eg ‘annual financial reports’ and ‘prospectuses’) and classification (eg ‘inside information’ and ‘major shareholding notification’). In our view, any tagging requirements for disclosure of price-sensitive information under UK MAR would need to be straightforward and recognise the urgency of such disclosure, and therefore not cause any delay in such time critical disclosures as that would be detrimental to the market. Moreover, in relation to such regulatory disclosures, there is unlikely to be any comparability/consistency of the underlying information being reported, and therefore in our view any such tagging should be to characterise/tag the type of disclosure, rather than being detailed tagging of the underlying information being disclosed.

 

We hope you find these comments useful. Please do not hesitate to make contact if you have any questions.

Your sincerely,

 

Liz Cole

Head of Policy and Communications

Investor Relations Society

(Email: enquiries@irsociety.org.uk, Tel: + 44 (0) 20 3978 1980)

 

Laura Hayter

Chief Executive Officer of the Investor Relations Society

(Email: enquiries@irsociety.org.uk, Tel: + 44 (0) 20 3978 1980)

 

 

Ross Hawley

Chair of the Investor Relations Society’s Policy Committee

(Email: enquiries@irsociety.org.uk, Tel: + 44 (0) 20 3978 1980)

Published 14 November, 2024