Policy RoundUp - July 23

Icole
Policy RoundUp 1.0 IR Programme, Strategy & Implementation

Dear Member,

It has been yet another busy month for policy, with the Chancellor delivering his keynote speech at Mansion House announcing a raft of proposals for UK financial services. It is welcome news that the government accepted all of the recommendations from Rachel Kent’s Investment Research Review, with the FCA due to push ahead with removing the requirement to unbundle research costs by the first half of 2024, given the findings from our recent member survey on Listing Rule reforms and Investment Research illustrate the issues that some companies have faced since the MiFID unbundling rules came in. As part of the Government’s push to repeal and replace retained EU law in financial services, the UK’s short selling regime is also to be reformed.

The FRC’s Corporate Governance Code consultation is still open (closing on 13th September, see May’s RoundUp), and the Society will shortly be running a member poll to assess your views on the issues that we think are most relevant to our members. We are also co-hosting a webinar with the FRC on 6th September so you can hear panel debates on the FRC’s proposals that will affect IROs, you can register here.

The CGI has published an updated board evaluation Code of Practice and guidance, particularly on dealing with potential conflicts of interest between external reviewers and members of the board, and the CIPD has issued a report on people expertise on boards.

The Investment Association has issued guidance on the effective requisitioning of shareholder resolutions where engagement with the company and voting on standard resolutions has not resulted in the desired outcomes, providing practical information on how legal and operational barriers for requisitioning resolutions or shareholder meetings can be overcome or mitigated.

Meanwhile, the digitisation taskforce is consulting on some provisional recommendations that intermediaries must improve their efforts to help companies communicate with their owners.

The proposed detail of the UK’s new reporting requirements for 750/750 PIEs that flow from the 2021 Audit and Governance White Paper has now been unveiled, aiming to build the environment of trust, transparency, and accountability necessary for fostering long term investment, financial stability, and business integrity. These include the Resilience Statement, Audit and Assurance Policy (AAP), fraud detection/prevention statement a statement about distributable profits and the company’s policy on distributions.

It is not too late to feed in your views on the non-financial information UK companies are required to provide, including on the cost/benefit of producing non-financial information, and the value of the information produced for the effective running of your company, in addition to how best to integrate International Sustainability Standards into the UK's reporting framework (closes 16th August).

Staying with reporting, the FRC’s thematic review of climate-related metrics and targets disclosure found room for improvement, especially in relation to metrics and targets and the disclosure of the effect of climate change on financial statements.

A surprisingly high number of listed companies still failed to meet the deadline for filing their digitally tagged reports last year, so companies still need to ensure they build in sufficient time for the tagging process. The FCA has also now streamlined its rules for annual financial reporting in electronic format.

The latest FRC Lab report on ESG data usage examines how investors obtain and use ESG data on companies, highlighting actions companies can take to facilitate this, referring to the findings from the Society's recent ESG survey examining IRO experiences with ESG data and investors/raters.

The FRC is also now consulting on the prospective use of the ISSB standards in the UK (closing 11th October), examining their usefulness, technical feasibility and proportionality of costs to benefits. In that context, the recently published  comparison between ISSB and TCFD requirements demonstrating alignment with TCFD disclosure is very welcome. IOSCO has now endorsed the ISSB standards, and the FCA expects to consult towards the end of this year on implementing them for listed companies, once the ISSB standards have been endorsed for use in the UK. The ISSB is also consulting on the tagging of sustainability-related disclosure (closing 26th September). 

The EU has moved a step closer to finalising its Sustainability Reporting Standards (ESRSs), retaining materiality assessments but with the definition of financial materiality being further aligned with the ISSB standards (to focus on primary users of financial reports), to provide better interoperability with global standards. A different set of standards will be developed for those overseas companies that are due to start reporting in 2029 in respect of FY2028.

Finally, the Taskforce for nature-related financial reporting (TNFD) has announced it will be launching its final recommendations on 19th September so watch out for those.

I hope you are all having a lovely Summer. Policy RoundUp will be taking a break in August, but there will be a bumper edition in September that will cover all the developments over the Summer break.

 

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

 

Jeremy Hunt Mansion House Speech

Jeremy Hunt, delivered his keynote speech at Mansion House this week where he announced a number of proposals to the UK’s financial services. This included a comprehensive set of reforms will help attract the fastest growing companies in the world to grow and list in the UK including: 

  • Draft legislation on changes to the prospectus regime.
  • The government has also accepted all of Rachel Kent’s Research Review, paving the way for a new ‘Research Platform’ that will provide a one-stop-shop for firms looking for research experts. 
  • Plans to establish an 'intermittant trading venue' that allows private companies to access capital markets without floating on a stock exchange. 

In addition the Chancellor and the Lord Mayor have supported an agreement between nine of the UK’s largest Defined Contribution pension providers, committing them to the objective of allocating 5% of assets in their default funds to unlisted equities by 2030. This could unlock up to £50 billion of investment in high growth companies by 2030 if all UK Defined Contribution pension schemes follow suit.

HM Treasury and the City of London Corporation have also jointly published the State of the sector: annual review of UK financial services 2023, which is the second annual report on the attractiveness and international competitiveness of UK financial services (recommended as part of the Hill Review).

UK Investment Research Review

Rachel Kent published the outcome of her review on 10 July 2023, making a series of recommendations to the government, Financial Conduct Authority (FCA) and industry. Her key recommendations are to:

  • introduce a Research Platform to help generate research
  • allow additional optionality for paying for investment research
  • allow greater access to investment research for retail investors
  • involve academic institutions in supporting investment research initiatives
  • support issuer-sponsored research by implementing a code of conduct
  • clarify aspects of the UK regulatory regime for investment research and consider introducing a bespoke regime
  • review the rules relating to investment research in the context of IPOs

The Chancellor has welcomed her report, and accepted all recommendations made to government. The commitment to take forward the review’s outcomes forms part of the government’s broader work to increase the attractiveness of the UK as location for large and small companies to raise capital.

Alongside this, the FCA published a statement welcoming Rachel Kent’s report.

Society findings from our member survey on Listing Rules and Investment Research

The Society has published “infographics” illustrating the findings from our recent member survey on the FCA's Listing Rule proposals and Investment Research, which are now available to members in the Knowledge Bank. They will be published more widely on our website as “White Papers” in due course.

The findings illustrate the issues that some companies have faced since the MiFID unbundling rules came in, and also on the timeliness of updates to analyst forecasts. The Society suggested that the FCA considers facilitating discussions over a voluntary code on the timeliness of third-party consensus models, under which providers of third-party consensus would be expected only to include timely and relevant forecasts, perhaps for example those that have been updated within the last six months, or within, say, three months following a material announcement (e.g. M&A, guidance update etc). It is welcome that the government has accepted all the recommendations from the Investment Research Review, and that the FCA has committed to start immediate engagement with the market to inform any rule changes on removing the requirement to unbundle research costs by the first half of next year.

Short Selling Regulation Review – Call for Evidence

The Government has published its response to The Treasury’s Short Selling Regulation Review: Call for Evidence, which sets out the next steps for replacing the UK Short Selling Regulation (UK SSR) with a UK-tailored regulatory regime for short selling. The government sees short selling as an essential tool to facilitate effective market functioning, supporting liquidity, risk management and effective price discovery. The Government is therefore strongly in favour of short selling as a feature of efficient markets, promising several relaxations to the existing UK SSR framework for shares while retaining the FCA's powers to intervene in emergency situations. The Government has committed to:

  • raising the threshold for privately notifying the FCA of net short positions back up to 0.2%; and
  • removing individual public disclosure of net short positions above 0.5%, and instead introducing an aggregated net short position disclosure on the relevant stock.

Digitisation taskforce – initial recommendations

The interim findings from the digitisation taskforce include provisional recommendations to end the issuance of new paper share certificates and ensure that intermediaries:

  • put in place common technology that enables them to respond to Ultimate Beneficial Owner (UBO) requests from issuers within a very short timeframe,
  • offer shareholder services that are fully transparent about whether and the extent to which clients can access their rights as shareholders, as well as any charges imposed for that service, and
  • (where intermediaries offer access to shareholder rights), the baseline service should facilitate the ability to vote, with confirmation that the vote has been recorded, and provide an efficient and reliable two-way communication and messaging channel, through intermediaries, between the issuer and the UBOs.

Feedback on the interim report should be sent to digitsatontaskforce@hmtreasury.gov.uk by 25 September.

FCA Streamlines its Rules for Company annual financial reporting in electronic format

The FCA is streamlining its transparency rules for preparing annual financial reports in a specific web browser format (XHTML), and to present the financial statements in it in the structured digital format. These changes move key provisions from the Technical Standard directly into the FCA Handbook, deleting the Technical Standard (and the remaining, unnecessary content), and create a simpler and quicker process for staying up to date with generally accepted taxonomies in a new Technical Note.

Issuers can now find the FCA’s requirements in new rules in DTR4.1, and guidance on generally accepted taxonomies in a new Technical Note in the FCA’s Primary Markets Knowledge Base.

More information on the reasons for, and scope of, these changes can be found in our Consultation Paper CP23/2 and Handbook Notice 111.

Many companies (10-15%) failed to meet the deadline for filing their digitally tagged reports with the NSM last year, so companies need to ensure they build in sufficient time for the tagging process.

New UK reporting requirements

A draft statutory instrument on corporate reporting has been published, which will strengthen reporting requirements for very large companies (with at least 750 employees and an annual turnover of £750 million or more) by introducing:

  • an annual Resilience Statement, setting out how a company is managing risk and building or maintaining resilience over the short, medium, and long term;
  • a triennial Audit and Assurance Policy Statement (AAP), explaining how the company proposes to assure non-financial reporting over the following three years as well as an annual update on the implementation of the policy;
  • an annual statement about distributable profits and the company’s policy on distributions; and
  • an annual statement on steps taken to prevent and detect material fraud.

These new requirements will boost the resilience of the UK economy, ensuring it continues to attract talent and investment. The FRC is developing guidance, informed by stakeholder outreach and a public consultation, to help companies in complying with the new reporting requirements which the FRC expects to publish before the reporting requirements come into effect.

DBT seeks views on ways to streamline non-financial reporting

As reported in previous editions of RoundUp, the Department for Business and Trade (DBT) call for evidence seeks views on the non-financial information UK companies are required to provide. The call for evidence examines the costs and benefits of producing non-financial information, the value of the information produced for the effective running of your company, and how the non-financial reporting regime might be improved in the future. It also investigates some wider reporting requirements such as modern slavery and gender pay gap reporting, and how these fit within wider non-financial reporting frameworks. Members are able to have their say here (DBT questionnaire is open until 16th August).

FRC thematic review examines quality of climate-related metrics and targets disclosures

The FRC has published its thematic review, assessing the quality and maturity of climate-related metrics and targets disclosures. The review found that there is room for improvement in TCFD disclosures, especially in relation to metrics and targets and the disclosure of the effect of climate change on financial statements.

Key findings show an incremental improvement in the quality of companies' disclosure of net zero commitments and interim emissions targets. However, disclosures of concrete actions and milestones to meet targets were sometimes unclear, and comparability of metrics between companies remains challenging.

Given the large volume of information presented, many companies are finding it challenging to explain their plans for transitioning to a low-carbon economy clearly and concisely. 

FRC Lab report on ESG data usage

The latest FRC Lab report on ESG data usage refers to the findings from the Society's recent ESG survey examining IRO experiences with ESG data and investors/raters.

The report, “ESG Data Distribution and Consumption”, examines how investors obtain and use ESG data on companies, and highlights what actions companies can take to facilitate this, including publishing data sheets containing all ESG metrics in one place to facilitate third-party and investor data collection, thus allowing annual reports to focus on the ESG risks, opportunities and progress that are material to their business, with strong interconnectivity between narrative and data reporting remaining critical to maintain credibility.

CGI publishes updated board evaluation Code of Practice and guidance

Following an independent review, the Chartered Governance Institute (CGI) has published updated versions of its:

The documents were first published in 2021 by the CGI (then, the Institute of Chartered Secretaries and Administrators, ICSA), as part of its final report on the effectiveness of independent board evaluation.

Changes made in this second edition of the Code of Practice include enhancing the guidance on dealing with potential conflicts of interest between the external reviewer and members of the board.

Investment Association guidance on Effective requisitioning of shareholder resolutions

The Investment Association (IA) has published guidance on Effective requisitioning of shareholder resolutions, which is intended to provide institutional investors with an overview of the key steps required to requisition a shareholder resolution. The IA guidance was produced in response to a 2020 report on stewardship published by the Asset Management Taskforce Stewardship Working Group that recommended shareholders use requisitioned resolutions more proactively and that the industry should develop guidance to overcome existing barriers to requisitioning resolutions.

The IA guidance says that requisitioned resolutions are an important escalation tool for investment managers where engagement with company management and voting on standard resolutions have not resulted in the desired changes in company behaviour.  It looks at the key considerations and legal and operational barriers that investors may face when requisitioning a resolution or shareholder meeting, as well as providing some practical information on how these barriers might be overcome or mitigated.

FRC consults on UK implementation of the ISSB Standards

The FRC, in its role as The Secretariat to the UK Sustainability Disclosure Technical Advisory Committee (TAC), has issued a call for evidence to inform the proposed endorsement of the IFRS Sustainability Disclosure Standards in the UK.
 
The ISSB published IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures last month.
This call for evidence seeks views on whether application of these standards in a UK context will result in disclosures that are understandable, relevant, reliable and comparable for investors. It also considers technical feasibility, timeliness alongside financial reporting, and proportionality of costs to benefits.
Responses are welcome from those preparing corporate disclosures, investors, and other stakeholders with an interest in sustainability reporting. Responses will inform the technical assessment for endorsing IFRS S1 and S2 in the UK.

IOSCO endorses ISSB Standards

IOSCO, the international standards setter for securities regulators, has officially endorsed the new IFRS sustainability and climate-related disclosure standards, determining them ‘appropriate to serve as a global framework for capital markets to develop the use of sustainability-related financial information’. IOSCO is now calling on its 130 member jurisdictions (including the FCA) to consider the incorporation of the new standards into their regulatory frameworks.

ISSB’s IFRS S2 comparison with TCFD

The IFRS Foundation has published a comparison of the requirements in IFRS S2 Climate-related Disclosures with the TCFD recommendations. The requirements in IFRS S2 are consistent with the four core recommendations and eleven recommended disclosures published by the TCFD, which means that companies applying the ISSB Standards will meet the TCFD recommendations and so will not need to apply the TCFD recommendations in addition to the ISSB Standards.

The incorporation of the TCFD recommendations into the ISSB Standards provides yet further simplification of the so-called ‘alphabet soup’ of disclosure initiatives for companies and investors.

The FSB has also asked the IFRS Foundation to take over the monitoring of the progress on companies’ climate-related disclosures from the TCFD.

ISSB consults on the tagging of sustainability-related disclosure

The International Sustainability Standards Board (ISSB) has published the Proposed IFRS Sustainability Disclosure Taxonomy for public comment. The proposals reflect the disclosure requirements in the ISSB’s first two Standards—IFRS S1 and IFRS S2.

A common digital taxonomy is necessary to facilitate structured digital reporting of sustainability-related financial information prepared applying the ISSB Standards, which will improve the global accessibility and comparability of sustainability information for investors.

The ISSB has been working on its digital taxonomy in tandem with the development of IFRS S1 and IFRS S2 to facilitate digital consumption of sustainability-related financial disclosures when its Standards are first applied.

The ISSB is seeking feedback on the proposals over a 60-day consultation period closing on 26 September 2023. The ISSB will review feedback on the proposals in the second half of 2023 and aims to issue the final digital taxonomy early in 2024, subject to the feedback received.

 

CSRD - EU Finalises Sustainability Reporting Standards (ESRSs)

Final versions of the European Sustainability Reporting Standards (ESRS) have now been adopted by the EU Commission, and put forward for approval by the EU Parliament and Council (who cannot amend them but do have right of veto).

The ESRS will apply from 1 January 2024 (for financial years beginning on or after 1 January 2024), in time for the first tranche of companies that are required to report under CSRD, but the Q&A indicate that for overseas companies with sufficient EU operations to be caught (reporting in 2029 in respect of FY2028), different standards will be developed.

The ESRS specify the sustainability-related disclosure that companies will need to provide when reporting under the Corporate Sustainability Reporting Directive (CSRD). The standards cover the full range of environmental, social, and governance issues, including climate change, biodiversity and human rights. They provide information for investors to understand the sustainability impact of the companies in which they invest. They also take account of discussions with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI) in order to ensure a very high degree of interoperability between EU and global standards and to prevent unnecessary double reporting by companies.

The ESRS remain largely unchanged from the version consulted on in June/July, despite fairly heavy criticism from all sides (with corporates concerned that they were too burdensome asset managers arguing that the move away from mandatory disclosure requirements hindered their ability to meet their own sustainability reporting obligations under SFDR. All disclosure requirements except the General Disclosures in ESRS 2 remain subject to materiality assessment), although any reporting entity which determines climate change (ESRS E1) not material must now provide “a detailed explanation” of the conclusions of their materiality assessment, including forward-looking analysis of conditions that could change the conclusion in future.

Importantly, to provide better interoperability with global standards, the definition of financial materiality has been further aligned between ESRS and ISSB (to focus on primary users of financial reports), and EFRAG have published a paper commending the “very high degree of interoperability” between the ESRS (ESRS 2 and E1) and the ISSB standards, including an ESRS-ISSB mapping table. EFRAG has also confirmed it will shortly publish the first draft EFRAG Implementation Guidance and FAQ regarding materiality assessments and value chain.

CIPD Issues Report on people expertise on boards

The CIPD have published a report on people expertise on boards, based on interviews with their members who are chief people officers or non-executives from HR backgrounds, and statistics from the main listed companies. The report highlights the gap between the many people challenges faced by companies and actual HR experience on boards.

CPOs also talk about common problems experienced when dealing with non-HR board members, including: 
- a lack of in-depth understanding of people issues 
- an overfocus on the financial skillset 
- an ‘overenthusiasm’ around employee engagement  
- a lack of emotional intelligence 
- a lack of awareness and discomfort around EDI (equality, diversity, and inclusion) issues.

TNFD launch date/webinar announced

Task Force for Nature-related Financial Disclosure has announced that it will launch the final version (v1.0) of it’s the TNFD Recommendations at a webinar on Sept 19th. TNFD’s launch webinar will cover:

  • TNFD's finalised disclosure recommendations
  • Additional guidance – the LEAP Approach, sector & biome-specific guidance, value chains, and more
  • Metrics

This marks the culmination of two years of market-led development, which has included four beta releases and 3000+ pieces of feedback analysed and incorporated into the design of TNFD’s recommendations and additional guidance.