Policy RoundUp - March 24
Dear Member,
I hope you've had a lovely Easter!
March has been another busy month for policy and regulation, with developments in market regulation, governance, non-financial and sustainability reporting, and of course the rapidly developing area of AI.
Firstly, we have seen more detail on the FCA’s proposed new Listing regime along with FTSE Russell’s proposals for its UK Index Series, and the Budget heralded the launch of the ‘Great British ISA’ and ‘PISCES’ – the new intermittent trading platform for private companies. The budget also included confirmation that the FCA will regulate ESG ratings providers.
The Society partnered the Investor Forum on their ‘Bridging the Gaps between Companies and Investors: Shaping Tomorrow's Dialogues’ white paper that was launched this month, which focuses on helping build stronger, more collaborative partnerships, and rejuvenating the investor-company dialogue. This project is ongoing, with further roundtables planned in 2024.
The FRC is hosting roundtables as part of its ‘root and branch' review of the Stewardship Code – I encourage members to participate in these to help steer this Code towards facilitating quality engagement with investors (see the dates/links below).
The EU is now very close to bringing in its landmark due diligence directive – the so called ‘CS3D’ - which will require monitoring and remediation of environmental and human rights violations along the value chains of the largest companies operating in the EU. The SEC has also finally agreed on some watered down climate-related disclosure requirements (assuming these survive the legal battles that are coming from both sides).
Given the growing need for reliable sustainability reporting, the FRC have launched a market review of sustainability assurance to look at competition and choice, market capacity and the possible impact on the statutory audit market.
Finally, I was delighted to introduce the expert panel for our recent webinar on ‘Navigating sustainability reporting requirements and investor expectations’ - there were lots of ideas for how best to engage with investors, and there is a link below to the recording.
Best wishes,
Liz Cole
Head of Policy and Communications
Linked in
www.irsociety.org.uk
MARKET REGULATION
Budget 2024 - IR highlights
What did the budget mean for Investor Relations? See our news item covering the ‘Great British ISA’, the regulation of ESG Ratings providers, and ‘PISCES’ – the new intermittent trading platform to promote liquidity in private capital (see also below).
PISCES – launch consultation
HM Treasury has issued a consultation outlining the development of PISCES - the new Private Intermittent Securities and Capital Exchange System, which is aimed at creating liquidity windows for private companies to trade shares at predetermined intervals.
PISCES is designed to provide a platform for secondary transactions in private company shares, with intermittent trading to be permitted only during active trading windows.
Disclosure within PISCES would maintain a 'private perimeter', requiring detailed company information available solely to eligible investors on the platform. Initially, trading on PISCES will be restricted to institutional and professional investors, with considerations underway to potentially include certain categories of retail investors in the future.
Proposed new UK Listing regime - more detail revealed
The FCA has published further details of their proposed new Listing regime, with full revised draft Listing Rules and Listing Principles, along with additional guidance on the suspension, cancellation and restoration of listing, internal controls, international company secondary listings and investment companies.
FTSE Index responds to FCA Listing reforms
FTSE Russell have published proposed changes to its UK Index Series in response to the FCA's proposed reforms to the listing regime in the UK.
Improving acquisitions reporting
The International Accounting Standards Board (IASB) has published a package of proposals aimed at enhancing the information companies provide to investors about acquisitions. The proposals respond to stakeholder feedback that reporting on acquisitions poses difficulties for both investors and companies:
- Investors lack sufficient and timely information about acquisitions and post-acquisition performance.
- Companies seek to provide useful information to investors but see risks and costs in providing some information, particularly commercially sensitive information that could be used by competitors.
The proposed amendments to IFRS 3 Business Combinations would require companies to report the objectives and related performance targets of their most important acquisitions, including whether these are met in subsequent years. Companies would also be required to provide information about the expected synergies for all material acquisitions. However, companies would not be required to disclose information that could compromise their acquisition objectives.
Feedback is requested by 15 July 2024.
FCA "Dear CEO" letters to Asset Managers on ESG and sustainability
With the FCA’s SDR and investment labelling regime coming into force from 31 July, the FCA has written again to the chief executives of alternative and mainstream asset management firms warning managers who promote their environmental, social, and governance credentials to ensure that their governance systems can oversee the resourcing and management of information about those activities, related compliance change programmes, any claims made, and third-party ESG data providers used.
Read more:
- Portfolio letter: Asset Management & Alternatives Supervisory Strategy - interim update
- Authorised ESG and sustainable investment funds: improving quality and clarity
GOVERNANCE UPDATE
‘Bridging the Gap’ with the Investor Forum
The Society partnered the Investor Forum on their latest white paper, which focuses on helping build stronger, more collaborative partnerships, and rejuvenating the investor-company dialogue, including reflections from investor relations, sustainability, corporate governance and audit perspectives. It sets out some practical actions that would improve best practice, reduce friction and strengthen relationships between companies and investors, enabling them to focus on long-term value creation.
Read our blog for a summary, including the ‘Top 10’ things investors are calling for.
FRC Roundtables on Stewardship Code
As part of the FRC’s review of the UK Stewardship Code 2020, it is hosting roundtable discussions to discuss whether the Code remains fit for purpose and potential areas for improvement. The roundtables are on 16/18 April for corporates, and 1 May for service providers.
The FRC is seeking views from all stakeholders on whether the Stewardship Code, in its current format, is being used by asset managers/owners in a manner that drives better stewardship outcomes from engagement with issuers. To inform their formal consultation, the FRC is hosting roundtable discussions to discuss whether the Code remains fit for purpose and potential areas for improvement. The FRC are therefore hosting roundtables on 16/18 April for corporates, and 1 May for service providers, to discuss issues such as engagement, short-termism and issuer reporting burdens.
Given the importance of regulation being uniformly proportionate along the value chain, this engagement is likely to cover issues such as the need to address how investors act on proxy voting guidelines in cases where there is appropriate departure from the Code, in order to compliment the ‘comply or explain’ approach within the Corporate Governance Code and help dispel any ‘comply or else’ mentality.
Glass Lewis Proxy Season Preview 2024
Glass Lewis has issued its Proxy Season Preview for 2024, offering an overview of local governance trends and regulatory updates, including an overview of the impact of the new diversity reporting requirements and a report on remuneration issues.
Ethnic and Gender Diversity
Ethnic Diversity
The Parker Review has published its latest annual report, with encouraging progress on boardroom diversity for ethnic minorities, but recognising that there is still more work to be done to improve ethnic minority representation at a senior management level.
Key findings from this year’s report include:
- 96% of the FTSE100 met the target of at least one minority ethnic director on their boards.
- Whilst 70% of the FTSE250 also met the target, the UK’s largest private companies lagged behind at just 44%.
- Across the FTSE100, ethnic minorities now hold 19% of all director positions. Across the FTSE250, ethnic minority director positions are held by 13.5%.
- The FTSE100 now has 12 ethnic minority chief executives (up from seven the previous year) and seven Chairs (up from six in 2022).
- Only 13% of senior management of FTSE100 firms were ethnically diverse, with 12% across the FTSE250, showing a much lower reflection of minority ethnic diversity below board level across the broader FTSE250.
Gender Diversity
Like the Parker Review findings, the latest report from the FTSE Women Leaders Review, which focuses on the representation of women on the boards and leadership teams of the UK’s largest companies, paints a positive overall picture for progress in achieving boardroom diversity but found little change to the number of female CEOs.
Women’s representation on FTSE 350 boards stands at an all-time high of 42.1%. The statistics for women in leadership paint a slightly less optimistic picture where, whilst overall the representation of women in FTSE 350 leadership roles (executive committee and direct reports) stands at an encouraging 35%, the number of women making it into the most influential roles remains significantly lower. Women make up just 15% of Chairs, 8% of CEOs and 18% of CFOs.
Women in leadership in private companies is almost on par with the FTSE 350, currently standing at 36%. However, they are trailing considerably behind public-listed companies when it comes to women on boards, with representation at 31%.
Revised QCA Code applicable from 1 April
Quick reminder that the revised Quoted Companies Alliance (QCA) Corporate Governance Code for small to mid-sized growth companies became effective from April 1, 2024. See the ‘Greater Governance’ feature in Spring Informed (Issue 122) for two articles on the revised QCA Code.
Government consults on draft Cyber Governance Code
The UK Government has sought feedback on a draft Cyber Governance Code of Practice, which is designed to ensure that organisations have detailed strategies in place to respond to and recover from any potential cyber incidents, and was designed by industry directors and cyber and governance experts. The draft outlines a series of actions on risk management, cyber strategy, people, incident planning and response, and assurance and oversight. These should be regularly assessed and accompanied by a formal system for reporting incidents.
Cyber Governance Code of Practice: call for views
NON-FINANCIAL AND SUSTAINABILITY REPORTING UPDATE
Non-financial reporting
The Government has confirmed it will remove various low-value, obsolete or overlapping requirements from the Directors’ Report, and from the Directors’ Remuneration Report and Policy, and make it easier for companies to issue digital annual reports.
The Government states that the regulations will directly benefit both preparers and users of annual reports and accounts by removing low-value and duplicative information and making annual reports shorter, more navigable and better focused.
Read more:
- Non-Financial Reporting Review: call for evidence - summary of responses
- Written statements - Written questions, answers and statements - UK Parliament
FRC review of sustainability assurance market
Given the growing need for reliable sustainability reporting, the FRC have launched a market review of sustainability assurance to look at competition and choice, market capacity and the possible impact on the statutory audit market.
SEC adopts climate-related disclosures
The Securities and Exchange Commission has voted to adopt rules to enhance and standardise climate change-related disclosures in the annual reports of domestic and foreign private issuer registrants and in public offerings. The long-awaited rule marks the first nationwide climate disclosure rule in the US, although the rule’s scope has been significantly scaled back from the original draft proposal. Scope 1 and 2 disclosures have been limited to emissions deemed financially material for larger SEC-registered businesses. Reporting of Scope 3 emissions along the value chain has been abandoned, and there is also no requirement to disclose remuneration linked to climate-related issues (unlike the equivalent ISSB and CSRD requirements). The rules are already being challenged in the courts by both sides.
EU Landmark Sustainability Rules
The EU is a significant step closer to requiring companies operating in the EU to monitor their supply chains for the risk of human and/or environmental rights violations, with the EU Council finally agreeing a watered-down Directive on Corporate Sustainability Due Diligence (‘CSDDD’ or ‘CS3D’), which was approved by the European Parliament's Committee on Legal Affairs.
The new rules will also deal with remediation of any such violations, require reporting on the due diligence findings and mandate Paris-aligned transition plans (but do not require them to be linked to remuneration). The ‘chain of activities’ covered by the due diligence obligations includes companies’ own operations, plus those of subsidiaries and their upstream and downstream value chain, but will focus on direct business partners (rather than indirect ones), and also only applies to the upstream activities of regulated financial undertakings.
Which companies would be in scope?
It will apply only to the largest companies operating in the EU, as follows:
- EU companies with 1000 employees and €450M turnover worldwide (or parent companies of groups meeting these thresholds),
- non-EU companies with €450M turnover in the EU (with no employee threshold), or parent companies of groups meeting these thresholds,
- EU and non-EU companies/groups receiving more than €22.5Mpa from within the EU under franchising or licensing agreements, with worldwide turnover exceeding €80M,
and is expected to catch around 5,500 companies. Once approved by the EU Parliament, it will be phased in from mid-2027 to mid-2029, with the largest companies (5000 employees and €1500M EU turnover) being brought in first.
Navigating ESG Reporting Requirements and Investor Expectations
Thank you to all who attended our recent webinar Navigating ESG Reporting Requirements and Investor Expectations Tuesday 26 May, excellently moderated by Hal Dewdney (Georgeson) and debated by panellists Rebeca Coriat (Head of Stewardship, Lombard Odier Investment Managers), Dror Elkayam (Senior ESG Manager – Investment Stewardship, Legal & General Investment Management), Ross Hawley (Head of Investor Relations, Redde Northgate) and Kalina Lazarova (Governance and Voting Lead, Phoenix Group).
The replay is now available in the Events Archive as part of the Knowledge Bank of IR Resources on our website.
AI UPDATE
AI Assurance: Building Trust in Responsible AI Systems
To support the principles set out in the Government’s recent response to the AI White Paper (see February’s RoundUp), the Department for Science, Innovation & Technology (DSIT) has released an Introduction to AI Assurance. This sets out some ‘Assurance Guidelines’, to help businesses navigate the evolving landscape of AI, and recommends some key actions including upskilling, and reviewing internal governance and risk management systems.
ABI guidance on responsible AI
The ABI has issued an "AI Guide: Practical ideas for getting started with responsible AI" for those working in the insurance and long-term savings industry in response to the developing regulatory framework. The Guide provides a starting point for engagement which includes key questions, known risks and good practice suggestions.
The Guide builds on the five principles underpinning the UK's AI policy (see February’s RoundUp), and uses them as the reference point for understanding AI-associated questions and risks. The Guide also provides an AI risk taxonomy within the context of each of the AI principles, and signposts existing regulations including FCA requirements, data protection and the Equality Act 2010.