Policy RoundUp - April 23

Written By

Icole

Tags

Policy RoundUp 1.0 IR Programme, Strategy & Implementation

Dear Member,

Firstly, I’d like to thank all our IROs who have participated in our member survey on ESG data and ratings – this has given us some valuable findings to inform the Society’s inaugural ESG data workshop happening later this month, and an evidence base to respond to the Treasury consultation on the possible future regulation of ESG ratings providers. Our next member poll will be looking at the UK’s Investment research market to feed into the Government’s review so please look out for that in your inboxes.

This RoundUp also covers the FCA’s latest proposals for shaking up the listing regime, replacing the premium and standard segments with a single segment, although we will have to wait until the Autumn for more detail on transitional arrangements for existing issuers.

Finally, the ISSB has today published its consultation on its Agenda Priorities for the next two years. Based on research into the information needs of investors, the ISSB sets out four potential projects: three sustainability-related research projects—1) biodiversity, ecosystems and ecosystem services; 2) human capital; 3) human rights—and a fourth project researching integration in reporting. The ISSB also asks about the relative priority of these projects, the strategic direction and balance of the ISSB’s activities and the criteria for assessing which sustainability-related matters to prioritise.

I hope you all had a lovely May Day Bank holiday, and are looking forward to the next one!

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

Topics covered this month:

Primary markets review - replacing premium and standard segments
Improving secondary markets
Pre-Emption Group (PEG) – revised Terms of Reference
UK Investment research review - member survey
ESG data and ratings
Global shareholder activism on the rise
Updated PLSA and PIRC Voting Guidance
Audit Committee engagement with investors
Ethnicity Pay Reporting guidance
ISSB – consultation on future work programme
Assurance for sustainability-related corporate reporting
EU Sustainable Finance Disclosure Regulation (SFDR)
Takeover Code - Competing Bid Framework and companies in financial difficulty
Hear SEC Commissioner Mark Uyeda as ICAEW keynote

Primary markets review - replacing premium and standard segments

As anticipated in last month’s RoundUp, the FCA has published its preliminary proposals to reform and streamline the listing rules in the hope of attracting a wider range of companies and improving choice for investors. The FCA proposes some significant changes, including replacing its existing ‘standard’ and ‘premium’ listing segments with a single category for equity shares in commercial companies (‘ESCC’), with a new category for SPAC and shell companies, and an additional ‘other shares’ category for overseas issuers that have a secondary listing on the standard segment. Under the FCA proposals, requirements would be focussed on transparency for investors to support decision making, with a modified sponsor role to provide oversight at the listing gateway to ensure companies can meet the FCA’s standards.

The FCA hopes that a single equity category, which would not have the requirement for 3-year earnings track record or audited historical financial information, would remove eligibility requirements that can deter early-stage companies. The proposals would also be more permissive on dual class share structures, and remove mandatory shareholder votes on transactions such as related party transactions and acquisitions (except reverse takeovers), to reduce frictions for companies pursuing their business strategies. The FCA outlines high-level proposals for transitional arrangements to enable existing issuers to transfer from the current standard and premium listing categories to the new single ESCC category, with more detail to follow in an autumn consultation. There is a useful summary of the proposals here, and the consultation closes on 28 June 2023.

Improving secondary markets

The FCA also published rule changes to improve how equity secondary markets operate as part of the Wholesale Markets Review, to tailor the UK’s rules post-Brexit, including the transparency regime for equity markets.

Pre-Emption Group (PEG) – revised Terms of Reference

As a further step towards modernising the UK capital markets, the FRC (on behalf of the Pre-Emption Group - PEG) has issued some revised Terms of Reference for PEG, to implement recommendations from the Secondary Capital Raising Review (SCRR) that the PEG's role in guiding best practice in relation to the pre-emption rights regime should be further centralised and formalised through revised terms of reference, and that the PEG's membership should be representative of UK capital markets. This follows the PEG’s new Statement of Principles on the disapplication of pre-emption rights in November 2022 that implemented the revised pre-emption regime set out in the SCRR.

UK Investment research review - member survey

Our next member survey will look into the ongoing impact of the MiFID II unbundling rules on the quality of investment research in the UK market. This will enable the Society to respond to the current review of investment research that is examining the importance of investment research to listed companies and their investors, and to the attractiveness of the UK public markets, so please do respond!

ESG data and ratings

Thank you to all our IRO members who responded to our recent ESG data and ratings survey. Our preliminary results indicate very strong IRO support for the FCA authorisation of ratings providers. We can refer to this when we respond to the current consultation on whether ESG ratings agencies should be brought within the FCA’s remit. Other insights from this research will be fed into the FRC Lab’s current project on ESG data usage, and the Society’s inaugural ESG data and reporting IR Teach in/workshop on 25^th May.

Global shareholder activism on the rise

This global report found that shareholder activist activity increased in Q1 2023, up 6% on 2022 and putting the level of activity well above pre-pandemic levels. The most targeted sectors were industrials and financial services followed by healthcare, with communication services and funds being the least targeted sectors. 'Governance' demands are still the most common, environmental demands decreased but there was a 25% increase in 'Social' demands. This is supported by Forbes, which found that activist investing is on the rise, particularly among large cap companies (with one in three companies in the FTSE 100 having an activist on its share register).

Updated PLSA and PIRC Voting Guidance

The Pension and Lifetime Savings Association (PLSA) has published updated Stewardship and Voting Guidelines for 2023, focusing on climate, executive pay, the workforce and diversity:

Climate – the PLSA notes that growing attention is being paid to transition plans, which should be underpinned by credible targets, with clear interim milestones and accountability mechanisms;
Executive remuneration – the PLSA reiterates its call for restraint when setting executive remuneration in light of the on-going cost of living crisis and the economic pressures being experienced by the wider workforce;
Workforce – a new section addresses how companies should approach issues such as employee wellbeing (including mental health support), workforce diversity and tackling modern slavery; and
Diversity – the guidelines note the recent updates from the FTSE Women Leaders Review and the Parker Review (see March’s Policy RoundUp), and the new requirements of the Listing Rules to report against diversity targets. The PLSA expects disclosure of obstacles and delays to achieving diversity goals, and details of how the background of directors standing for re-election help toward board diversity.

PIRC (the Pensions & Investment Research Consultants) has also re-issued its Shareowner Voting Guidelines for the 2023 AGM season. The guidelines are available by subscription on the PIRC website.

Audit Committee engagement with investors

The FRC Lab has issued some 'conversation starters' to promote better engagement between investors and audit committees, to facilitate better understanding of companies and their approach to financial reporting and internal control. Direct investor conversations with audit committee chairs can provide better insights into the company's approach to regulatory focus and areas of interest to market participants. To encourage such conversations, this series of conversation starters is structured by topic/risk (including climate, cyber, fraud and internal controls), with an initial broad question followed by several more detailed follow-up questions, which are aimed at investors wishing to engage with audit committees and companies on assurance-related topics.

Ethnicity Pay Reporting guidance

The Government have published some voluntary guidance for employers on Ethnicity Pay Reporting. This is more complex than gender pay gap reporting so, whilst the Guidance uses the same pay calculation process as the gender pay gap regulations, the overall approach is more detailed, and employers are advised to identify the appropriate ethnicity classification structure, review the data, look for explanations on pay disparities, produce a narrative and draft an action plan.

The Guidance suggests that employers carry out eight calculations, with three measures relating to pay, and a further two detailing ethnic representation. Three calculations relating to bonus pay should only be included if bonus pay makes up a large proportion of pay. The reason for using a range of measures, rather than one single measure, is because of the complexity of the ethnicity pay gap. One of the main challenges with ethnicity pay reporting is incomplete data and the impact this has on calculating a pay gap.

ISSB – consultation on future work programme

The International Sustainability Standards Board has today published its long-anticipated consultation on Agenda Priorities for its next two-year work plan. ISSB is asking stakeholders about potential research projects on:

biodiversity, ecosystems and ecosystem services;
human capital, with an initial focus on diversity, equity and inclusion;
human rights, with an initial focus on labour rights and communities’ rights in the value chain; plus; and
a joint project with the International Accounting Standards Board (IASB) on connectivity in reporting, building on the IASB’s Management Commentary project and the Integrated Reporting Framework.

Given the size of these potential projects, which would limit the progress that could be made across all four projects in two years, the ISSB is also seeking views on the relative priority of activities to determine potential trade-offs.

Stakeholders are also asked for feedback on the strategic direction and balance of the ISSB’s activities; the criteria for assessing which sustainability-related matters to prioritise—including topics, industries and activities; and the scope and structure of potential new research and standard-setting projects.

The consultation closes on 1 September 2023.

Assurance for sustainability-related corporate reporting

IOSCO, representing the international securities bodies including the FCA, has issued a report on the global assurance framework for sustainability-related corporate reporting. IOSCO continues to work closely with international partners to develop common standards for reliable sustainability-related corporate disclosures. IOSCO’s report outlines some key considerations for the standard setters and other stakeholders across the reporting ecosystem (focusing on issuers and assurance providers), as the work progresses.

EU Sustainable Finance Disclosure Regulation (SFDR)

The European Commission (EC) has issued further FAQ guidance on the interpretation of the Sustainable Finance Disclosure Regulation (SFDR), in the form of responses to questions put to it in September 2022 by the European Supervisory Authorities (ESAs). The responses include guidance on the definition of sustainable investment, disclosures around the reduction of carbon emissions and principal adverse impact disclosures. The EC has also issued some updated responses to its published Q&A from July 2021 and May 2022.

The ESAs are also consulting on proposals for amendments to the SFDR. If the proposals are eventually adopted, the changes would be quite material and could impact the categorisation of certain Article 9 funds due to proposed changes to the Do Not Significantly Harm (DNSH) test and Principal Adverse Impact (PAI) indicators), and require detailed disclosures of any product level GHG emission targets. The consultation is open until 4 July 2023.

Takeover Code - Competing Bid Framework and companies in financial difficulty

The Takeover Panel has published two response papers on the offer timetable in a competitive situation where one of the bidders is proceeding by scheme of arrangement (RS 2022/3) and on miscellaneous amendments to the Code (RS 2022/4), with changes broadly as proposed in the consultation papers (PCP 2022/3 and PCP 2022/4). The changes take effect on 22 May 2023, and will apply to on-going transactions which straddle that date.

The changes to the offer timetable in a competitive situation follow on from the substantial changes made in July 2021 to better accommodate the lengthy timeframes that can be involved in satisfying conditions relating to official authorisations and regulatory clearances. The changes clarify two issues in cases where one of the competing bids is proceeding by scheme of arrangement, and relate to:

the timing of the auction procedure; and
how shareholders decide between competing bids with different structures.

The miscellaneous amendments relate to dealing with companies in serious financial difficulty, rumour or speculation following a DTR 5 disclosure and recommendations by the target board.

Hear SEC Commissioner Mark Uyeda as ICAEW keynote

Finally, given the UK’s regulatory landscape will be evolving over the coming months, the ICAEW is hosting a series of events sharing insights and international best practice on how Britain can build and maintain world-class regulation, the first of which will have Commissioner Mark Uyeda from the SEC as keynote, who will talk about the mission of the SEC in protecting investors, supporting markets and facilitating capital formation, as well as the importance of corporate reporting in well-functioning markets. Attendees will also have the opportunity to ask questions to Commissioner Uyeda on economic and regulatory policy issues. This event is taking place on Friday 12 May at 11:00am at Chartered Accountants Hall and Members of the Investor Relations Society are invited to book their place here.

Links for further information:

Primary markets review - replacing premium and standard segments

Improving secondary markets