Policy RoundUp - March 2023

Written By

Icole

Tags

Policy RoundUp 1.0 IR Programme, Strategy & Implementation

Topics covered in this issue are:

Replacing premium and standard segments
Market abuse
Investment research review
Investment landscape broadens with retail
Diversity – what it delivers, and latest progress
The UK’s Green Finance Strategy
Climate scenario-analysis guidance for asset managers
FTSE 100 Transition plan disclosures not yet ‘credible’
ISSB - phased reporting. starting with climate, and connectivity/intergrated reporting
Slippage of ESG-related measures – UK SDR and EU ESRS ISSB - phased reporting. starting with climate, and connectivity/intergrated
ESG data and ratings
Nature reporting – TNFD
FRC – Tech Hub, Lab Insight on AI, plus the Lab’s ongoing projects

Dear Member,

Replacing premium and standard segments

The breadth and pace of regulatory change for Investor Relations continues this month, with Nikhil Rathi announcing the FCA’s intention to press ahead with its plans to replace the premium and standard segments with one single category with a single set of requirements. Mr Rathi also announced some new proposals to remove compulsory shareholder votes for large and related party transactions, which is likely to be a welcome change as existing rules can put premium listed companies at a disadvantage in competitive M&A processes. However, the disclosure regime around these transactions would be retained. The requirement for a three-year financial track record as a condition for listing is also to be removed, to enable a broader range of companies (particularly high-growth tech sector candidates) to list in London. Details of all these proposals are expected in an FCA consultation paper to be published “soon”.

Market abuse

The FCA has issued a warning that multimedia should not be used in regulatory announcements, as this risks breaching certain DTR and market abuse requirements. In Primary Market Bulletin 44, the FCA explains that use of audio and video content creates a risk of harm to market users through a potential reduction in clarity, particularly if it makes it less clear to the reader what is regulated information, including inside information, and what is not. There is therefore a risk that regulatory announcements containing multimedia content could breach Article 17(1) of the UK Market Abuse Regulation, which prevents issuers combining the disclosure of inside information with the marketing of their activities, and DTR 6.3.5R, which requires issuers to communicate regulated information to the market in full unedited text. PMB 44 also confirms there will be no prospectus requirements on 'mix and match' schemes of arrangement.

The FCA/HM Treasury review of the criminal market abuse regime, which sets out the UK’s criminal sanctions for insider dealing and market manipulation, has concluded identifying a number of areas where the government believes it would be appropriate to update the criminal regime. The government will consider changes to the criminal regime alongside the proposed reforms to the civil market abuse regime, as another of the “Edinburgh reforms” is the repeal of the Market Abuse Regulation, which will be replaced with UK-specific legislation.

Investment research review

A new Review into the UK’s research and investment landscape has now been launched as part of the “Edinburgh reforms”, in response to concern about the quality and quantity of investment research produced in the UK as compared to other jurisdictions - particularly for certain sectors like tech and life sciences - and that this could undermine valuations and therefore the attractiveness of the UK as a place to list and make it harder for companies to access capital. The review will consider the provision of investment research and its contribution to the competitiveness of the UK's capital markets, and the impact of the MiFID II unbundling rules on the levels and quality of investment research. The review will run until June 2023, and may recommend both legislative and non-legislative measures.

Investment landscape broadens with retail

The IR Society’s very topical webinar on The changing landscape of Retail IR yesterday illustrated the importance and challenges of engaging retail investors and was a great discussion with plenty of insight and practical takeaways. If you missed it, the replay is now available in the Events Archive as part of the Knowledge Bank of IR Resources on our website.

The QCA/M&S campaign to modernise shareholder relations by 'giving shareholders a voice', in conjunction with the UK Shareholders' Association and ShareSoc, proposing improvements for the UK markets by reforming company law so that digital AGMs are properly recognised and companies can communicate with their investors via retail platforms.

Diversity – what it delivers, and latest progress

Recent research has found that gender balanced boards are more likely to improve company culture. This new qualitative analysis was based on the engagement of male and female directors in 100 FTSE board reviews in a report titled ‘Evidencing the Contribution of Gender Balance to Board Effectiveness’. The survey showcases the difference gender diversity makes to the running of corporate boards, with a significant finding that women are more likely than men to focus on emerging issues, notably company culture and employee development. Women were 50% more inclined to raise ESG performance as an area for improvement. In addition, female directors were also more likely to offer criticism and recommendations for improvement on both their own performance and their business activities. By demonstrating the link between diversity and effective oversight, this study hopes to renew the impetus of boards to go beyond the traditional candidate pool, to secure directors with a broader set of skills and backgrounds.

The latest report on gender balance in FTSE leadership from the FTSE Women Leaders Review, an independent framework which sets recommendations to improve the representation of women on boards and leadership teams of the UK’s largest companies, shows steady progress in getting women leaders to the top table of business in the UK. Women’s board representation across FTSE 350 companies increased by nearly 3% in 2022 (40.2%), three years ahead of the 40% target by December 2025 set by the Hampton Alexander Review. FTSE 350 leadership positions below the board level held by women stands at 33.5%. This year’s Women in Finance Charter report also shows a very positive picture overall for gender diversity. Signatories are making progress against their Charter commitments, with more than 81% of signatories having met or on track to meet their targets for female representation in senior management.

This year’s report shows average senior female representation across Charter signatories increased to 35% in 2022
Almost three quarters of signatories increased their proportion of women in senior management
Signatories’ ambitions for their targets continue to increase, with 50% setting a target of at least 40%

The 2023 update report from the Parker Review on Improving the Ethnic Diversity of UK Business found that, while progress has been made since the review started, work is still needed by the FTSE 250 on the 'pipeline' within senior management. The scope of this initiative has therefore been broadened, with new initiatives to improve ethnic diversity of FTSE 350 senior management teams (eg Exco and their direct reports) and the top 50 largest large private companies by December 2027.

The FCA's Primary Market Bulletin 44 examines the new Listing Rule requirements to report against the FCA's ethnic and gender diversity targets and to publish numerical data on the make-up of the board and the most senior management, applicable for financial years beginning on or after 1 April 2022 but with the FCA encouraging early adoption. The FCA's six steps for issuers to prepare include reviewing your oversight of D&I targets, existing narrative reporting, systems and controls over data collection and reporting, and any legal restrictions that could prevent collection or publication of the required data. Where the targets are not met or you do not have the relevant data, the FCA suggests developing clear and meaningful explanations, and a review of the effectiveness of board succession and recruitment plans.

The UK’s Green Finance Strategy

The UK Government has published its 2023 Green Finance Strategy, which focusses on the adoption of global standards, transition plans and nature, and sets out its commitment to support the work of the ISSB, as well as announcing it will set up a framework to assess the ISSB Standards for their suitability for adoption in the UK as soon as the final standards are published (expected summer 2023).” Q3 will also see a call for evidence on scope 3 GHG emissions reporting, and Q4 will see consultations on the introduction of requirements for the UK’s largest companies to disclose their transition plan if they have them, and on how best the final TNFD framework (see below) should be incorporated into UK policy and legislative architecture.

Climate scenario-analysis guidance for asset managers

The latest guidance from the UK Climate Financial Risk Forum (CFRF), which shares best practice across financial regulators and industry to advance the sector’s responses to financial risks from climate change, is aimed at supporting asset managers in developing their scenario analysis to manage climate risk and prepare for climate action.

FTSE 100 Transition plan disclosures not yet ‘credible’

New research by EY indicate that disclosure standards are needed, finding that despite about 80 per cent of FTSE 100 companies having already disclosed some sort of transition plan that includes public targets to achieve net zero emissions by 2050, only 5% of FTSE 100 have published Net Zero plans that are sufficiently detailed and actionable to be deemed ‘credible’ under Transition Plan Taskforce’s (TPT) draft disclosure framework.

The UN has issued a timely Integrity Matters report making 10 recommendations businesses should implement to develop a robust net-zero strategy with credible commitments and a roadmap to evidence-based action. This new briefing for board directors adds key questions board directors should ask to consider how the UN’s recommendations apply to their businesses, that will help ensure that board directors are complying with their duties around care and diligence. It also provides a list of follow-up reading around the topics to deepen understanding and drive climate action at board level.

ISSB – phased reporting, starting with climate, and connectivity/integrated reporting

The ISSB is considering further transitional reliefs to support companies applying its initial two Standards—S1 and S2, which would allow companies applying the ISSB Standards to phase in their approach to sustainability-related disclosure, beginning with climate-related risks and opportunities in the first year of reporting. Full reporting on sustainability-related risks and opportunities (beyond just climate) would then be provided from the second year. The ISSB remains on track to publish its initial two Standards—S1 and S2—towards the end of Q2 2023.

The International Accounting Standards Board (IASB) has added a project to its work plan to explore whether and how companies can provide better information about climate-related risks in their financial statements.

The ISSB will also soon be consulting on its agenda priorities, which will ask stakeholders about building on the IASB’s Exposure Draft Management Commentary and/or the Integrated Reporting Framework. To set the scene, it has issued a joint article explaining what is meant by connectivity in relation to the IASB and ISSB, which talks about connectivity in reports, in product and in process and fully acknowledge it is still in the early days of connectivity journey―and the work will evolve over time as they learn from each other and as the wider financial reporting ecosystem develops.

Slippage of ESG-related measures – UK SDR and EU ESRS

The complexity of introducing ESG-related regulatory measures is causing some slippage – for example, the delay in FCA rules for investor Sustainability Disclosure Requirements (SDR) and investment labels from Q2 to Q3 2023 (with proposed effective dates adjusted accordingly). However, there is broad support for the FCA’s proposed regime and the outcomes it is seeking to achieve, and the delay will hopefully allow greater international cohesion with other regimes such as the EU and US. This is a concern raised by the Treasury Sub-Committee Inquiry examining greenwashing, which wrote to the FCA questioning international divergence/convergence and the potential risk to the funds industry were the FCA requirements to become too onerous for US or EU based funds. The EU’s sector specific European Sustainability Reporting Standards (ESRS) have also been delayed, to enable EFRAG to prioritise capacity building for the implementation of the first set of ESRS.

ESG data and ratings

The Society is currently surveying our IRO members to help us better understand IRO experiences with ESG data and ratings agencies. The findings can inform our policy committee response to the HM Treasury consultation on the possible future regulation of these agencies by the FCA (closing 30^th June), and also help provide some Society views for us to feed into the FRC Lab’s current project on ESG data usage.

The FCA has issued a Dear CEO letter criticising ESG ratings and benchmark providers, as a recent FCA review found them “poor” in their transparency and methodology. The letter outlines the issues identified, including:

not enough detail on the ESG factors considered in methodologies;
not ensuring that underlying methodologies are accessible, clearly presented and explained to users;
not fully implementing ESG disclosure requirements; and
failing to implement methodologies correctly (for example, using outdated data).

The FCA will be doing more work in this area to holistically consider the risks of harm related to ESG benchmarks across the value chain. The FCA has also reiterated its support for regulation of ESG ratings agencies.

To learn more about how corporates can ensure they remain investable by providing the right data for the differing needs of investors, with a focus on meaningful information that will drive long term value and performance, join the Society in late May for an IR Teach In for ESG data and reporting, to help corporates prepare for the growing wave of investor interest. We will explore this topic with a panel of IROs and investors, followed by an interactive workshop to share experiences, challenges and opportunities for getting ahead of the wave. please continue to ask people to register your interest.

Nature reporting - TNFD

The Taskforce on Nature-related Financial Disclosures (TNFD) has released its fourth (v0.4) and final draft of the framework, , with comments welcome until 1 June ahead of its final recommendations due in September 2023. For the first time, market participants can view a full representation of the framework, including the Taskforce’s proposed approach to disclosure metrics. TNFD seeks to strike the right balance between being science-based and yet practical for market participants to use as part of the annual reporting cycle and on a limited assurance basis. The Taskforce has adapted the notion of ‘Scopes’ (Scope 1, 2 and 3 in climate reporting) to the nature context as ‘direct’ operations, ‘upstream’, ‘downstream’ and ‘financed’. Aligning with the TCFD approach will help to encourage and enable market participants to move towards integrated climate-nature disclosures, and the Taskforce has also released draft guidance on its proposed approach to the use of scenarios for nature-related issues.

FRC – Tech Hub, Lab Insight on AI, plus the Lab’s ongoing projects

The FRC Lab’s latest Insight report on current market issues: “AI, Emerging Tech and Governance” sets out key takeaways from their recent stakeholder roundtable that cover

governance: including consider skills diversity of boards and their training,
investors are an important stakeholder group to challenge and question management on AI from a risk and opportunity perspective and to understand the technology's social impact, and
responding to the challenges: including engaging in the debate, with regulators assisting in developing/promoting best practice.

By the end of the year, the wider FRC plan to publish case studies that explore the intersection of AI and tech with guidance and frameworks, and the Lab aims to analyse how companies include AI in annual reports and consider emerging good practices. The FRC has also launched its Technology and Digital Hub that will provide an overview of the organisation's work in this area.

The FRC Lab is also still seeking participants for its latest review of business model reporting, to examine how this reporting has evolved, including how it is described, how the business model is used as a driver for other disclosures across the annual report and accounts and how it can provide the most useful information for stakeholders. Company reporting of current business model and its evolution assists stakeholders in assessing sustainability, viability and resilience, and findings from this project (and other current Lab projects on materiality and distribution/consumption of ESG data) will likely feed into the development of the new resilience statement, which is to be brought in as part of the Government's corporate governance, reporting and audit reforms – the Society will be responding to the FRC consultation on the revised Code, which is now expected in May.

I hope you all have a lovely Easter!

Best wishes,

Liz Cole

Head of Policy and Communications

The Investor Relations Society

Tel: +44 (0) 20 7379 1763