Policy RoundUp - February 23

Written By

Icole

Tags

Policy RoundUp 1.0 IR Programme, Strategy & Implementation

Dear Member,

The UK competition and Markets Authority (CMA) has at last issued Draft Guidance on Environmental Sustainability Agreements, which is intended to provide more certainty on antitrust risk for businesses that enter into agreements aimed at achieving environmental goals amid concerns that legal uncertainty could chill legitimate efforts to work together to combat climate change.

Environmental concerns remain a hot topic in the annual investor demands ahead of 2023 AGMs, including the annual 'Dear Chairperson' letters from Aviva and LAPF Forum. Aviva's priorities include the need for a just transition, early preparation for nature-related reporting (TNFD) and the cost-of living crisis, and the LAPF Forum has repeated their 2022 call for all companies to table a 'Say on Climate' vote. Meanwhile, the Investment Association has announced that IVIS is increasing its diversity targets, with red tops for FTSE 350 and small cap companies that fail to meet gender diversity targets.

The QCA has published a review of its Corporate Governance Code, which is followed by AIM companies, finding that the code has encouraged improved disclosures, communication and better engagement with stakeholders. The QCA announced that it will be updating the code this year but it will aim to continue to “walk the line between credibility and flexibility in support of growth”. Meanwhile the Financial Reporting Council has produced a three-page myth-buster to help dispel Corporate Governance and Stewardship misconceptions, and published the latest list of UK Stewardship Code signatories, which has increased to 254, bringing the total assets under management of the list to £46.4tn.

Turning to diversity and inclusion, the recently published EY European Financial Services Boardroom Monitor found that Europe’s largest financial service firms are taking proactive steps to increase female representation and enhance their sustainability expertise at the boardroom level.

PwC’s latest Investor Survey highlights the need for businesses to address investor concerns about transparency and data when it comes to their ESG commitments, to improve access to capital, value for stakeholders and reduce reputational risk. The reports states that 74% of UK investors say that an independent reasonable assurance opinion gives them confidence in the accuracy of a company’s sustainability reporting.

PwC have also issued a report examining executive pay, net zero and investor expectations, which shows that while most large European companies are including carbon targets in executive pay, they almost always fall short of what investors are looking for. For example, fewer than half of companies disclose targets prospectively, whereas many investors view prospective disclosure as a critical component in building trust and accountability. The report also looks at some of the challenges and complexities of including carbon targets in pay, revealing that only 14% of companies currently have targets that are significant, measurable, transparent, and with a disclosed link to strategy.

To help improve sustainability reporting, the ISSB is ramping up activities to support global implementation ahead of issuing inaugural standards at end of Q2 2023, taking its final decisions on all the technical content of its initial Standards. The ISSB has also agreed for IFRS S1 and IFRS S2 to be effective from January 2024. This will allow businesses to collect sustainability disclosure information for the 2024 reporting cycle for inclusion in their 2025 reports - “the decision on effective date is answering the strong demand from investors for companies globally to disclose comprehensive, consistent and comparable sustainability-related information”. We can expect additional standards covering disclosure of other sustainability topics, and, as chair Emanuel Faber has commented, guidance on “adoption strategy, the support to adopt, the scalability, the capacity building, the proportionality… this is fully a part of what we need to deliver.” The ISSB also agreed to reference the European Sustainability Reporting Standards (ESRS) within the climate-related reporting S1 appendix “as a source of guidance companies may consider, in the absence of a specific ISSB standard, to identify metrics and disclosures if they meet the information needs of investors.”

As a backdrop to these sustainability reporting developments, the WEF’s ‘18th edition of Global Risks Report’ cites failure to mitigate climate change and failure of climate change adaptation as the top two long-term risks. The WWF has also issued a pragmatic report exploring ways that the scope of transition plans can be broadened to include nature.

In the UK, the Green Finance Institute (GFI) issued a report on promoting the international interoperability of a UK Green Taxonomy, highlighting that regulatory proliferation risks make it more difficult and costly for investors to invest in green assets. The report also sets out how the UK can address this challenge through the development of a UK taxonomy that carefully considers cross-border investing, and focuses on international harmonisation. Meanwhile, HMT has published a speech by John Glen, Chief Secretary to the Treasury, setting out the environmental and economic vision for the UK. In his speech, Mr Glen spoke about the issues relating to biodiversity; securing £500 million in private finance to support nature’s recovery by 2027; green finance and nature-related risks; and the work of the UK Government and the Taskforce for Nature-Related Financial Disclosures (TNFD) to mitigate such risks.

The FCA has published a discussion paper for asset management entitled “Finance for positive sustainable change: governance, incentives and competence in regulated firms” that explores current practices, and how they, and the regulatory initiatives that guide them, may need to evolve to support the industry. Of most interest for investor relations are the sections dealing with “Ongoing information needs of investors” and “Improving investor engagement through technology”. According to this report, the immediate action for firms will be to have a credible plan to achieve sustainability objectives and targets, and culture and governance frameworks to support that plan with clear roles and responsibilities for delivery and progress against metrics. Firms should also think ahead as to how they will modify their plans, governance and culture to adapt to a broader range of ESG objectives and targets in the medium to long term, such as biodiversity, nature preservation, and how their actions affect communities and human rights. Sacha Sadan, the FCA’s Director of ESG also wrote a blog alongside the DP setting out how the regulator expects firms to consider these issues and challenging the industry to move from well-meaning commitments to real action. Sadan notes that positive, sustainable change goes beyond climate change and involves looking at other environmental issues, such as biodiversity and nature, and the FCA is now encouraging financial institutions to incorporate these wider elements into their ESG strategies and approach to matters such as governance and incentives.

The pace of change is not fast enough for some activists, with environmental charity ClientEarth challenging the FCA over Prospectus Climate Risk exposure by seeking a judicial review in the High Court, claiming that the UK’s financial regulator unlawfully approved the IPO prospectus of a UK oil and gas company, which allegedly failed to adequately describe the climate-related risks associated with the company in its prospectus.

ClientEarth have also filed the first derivative action against a Board of Directors over failure to properly prepare for the energy transition. ClientEarth issued a claim in its capacity as a shareholder against Shell's board of directors, with support from institutional investors, alleging Shell's board is not doing enough to prepare for the net zero energy transition and is failing to manage climate change risks.

Looking at corporate reporting, BEIS - which has now been split between the new Department of Energy Security and Net Zero (DESNZ) and the new Department for Business and Trade (DBT) - issued a consultation on changes to payment practices reporting, which would require reporting businesses to include their payment practices and performance information in their directors' report and introduce further validation, for example from the audit committee. This could result in yet more disclosure requirements for directors’ reports, which will perhaps not be welcome news for the QCA following their recent review demonstrating the ever-increasing size of annual reports.

February also saw guidance for the effective assessment of cyber security, providing tools to guide and drive internal and external discussions on risk management decisions critical to cybersecurity. For example, they can help inform Board discussions and Board oversight. The Department for Digital, Culture, Media & Sport (DCMS) has issued a call for views on cyber security risks of software, seeking views on the cyber security risks of software used by businesses and organisations, and where government should seek to mitigate them.

Finally, the Society responded to the proposed UK disclosure framework for transition plans, supporting the proposals but calling for more flexibility in the way transition plans are published so that companies are permitted to include them in their annual report or other relevant reports (eg sustainability or climate reports), instead of always being required to publish them as standalone reports. The Society has also written to the FRC seeking dialogue over plans to increase shareholder engagement with audit and risk.

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

Links for further information:

CMA: Draft Guidance on Environmental Sustainability Agreements

IR Society: The latest Investor demands ahead of 2023 AGMs

Aviva: Investors’ 2023 stewardship priorities

LAPF Forum: 2023-Say-on-Climate-press-release.pdf