Policy Roundup - May 2024
Dear Member,
In the last month we have seen the FCA issue a warning that failure to file tagged reports within the four month deadline will result in temporary suspension from trading, along with guidance on LTIP approvals and changes to the ethnicity categories for D&I reporting. There have also been developments for M&A, with the Takeover Panel making it clear that it expects bidders to disclose their business rationale for the acquisition and their intentions for the 12 months following completion.
‘Relationships matter’ was the clear message from the Society’s latest joint event with the Investor Forum, with both corporates and investors reiterating the importance of understanding the purpose of any engagement. Below you will find five simple yet essential principles of effective communication and collaboration, along with some top recommendations that companies would really love investors to do, or do better, to make relationships stronger and more valuable by improving both the effectiveness and efficiency of dialogue.
The government's Carbon Budget Delivery Plan to achieve net zero by 2050 has again been found unlawful as not sufficiently evidence-based. Helpful then that the first UK Net Zero Business Census has been delivered, which establishes a benchmark for the private sector's contribution to the UK's national 2050 net zero target by gathering a dataset of UK organisations' progress on net zero.
Meanwhile, we have now also had confirmation of the delayed timetable for UK Sustainability Disclosure Requirements, with the government now aiming to make UK Sustainability Reporting Standards (UK SRS) available from Q1 2025, allowing the FCA to use the UK SRS to introduce sustainability reporting requirements for UK-listed companies (consultation expected in early 2025).
However, the recent announcement of the 4th July election means we won’t see any new policy consultations until the new government is formed, so there will be further delays to the anticipated consultations on Transition Plan Disclosure and the UK Green Taxonomy. It is no time to down tools though as we are responding to HMT’s current consultation on unbundling fees for investment research (see April’s RoundUp), and we are also preparing for an FRC roundtable examining the assurance market for sustainability reporting in late June (see March RoundUp for more detail on this FRC review).
As usual, there have also been international developments including implementation guidance on EU Sustainability reporting requirements and their interoperability with the ISSB standards, the EU’s long-awaited guidelines on sustainability-related fund names, and progress on the interoperability between GRI and the ISSB Standards, to facilitate reporting on an organisation’s impacts, risks and opportunities, including risks that arise from the organisation’s impacts.
I look forward to seeing many of you at the conference next Wednesday, which is shaping up to be a fantastic day full of discussion around the key issues and opportunities currently facing Investor Relations – book your last minute tickets here!
Best wishes,
Liz Cole
Head of Policy and Communications
Linked In
www.irsociety.org.uk
MARKET REGULATION
Listing regime – latest FCA guidance in Primary Market Bulletin 49
The FCA has published Primary Market Bulletin 49, which provides guidance on long term incentive plans (LTIPs), disclosure and filing obligations in relation to annual reports, changes to ethnicity categories for diversity and inclusion reporting, along with an update on the changes to UK sustainability reporting standards (see also the update below).
Key points to note include:
- LTIPs – following a review of compliance by 25 premium listed companies with Listing Rule obligations in relation to LTIPs, the FCA reminds companies that these obligations include obtaining shareholder approval for LTIPs prior to their adoption, publishing a shareholder circular setting out a summary or the full terms of the scheme and filing the circular with the NSM.
- Annual reports – a reminder for issuers of the publication and filing requirements for annual reports, including the obligation to prepare the report in structured electronic format (SEF). As has been mentioned in previous RoundUps, the FCA continues to observe low levels of compliance and notes that it will temporarily suspend the securities of companies that do not meet the four-month publication deadline set out in DTR 4.1.3.
- Sustainability reporting standards (see also below) – the FCA has set out a revised timetable for its consultation process. Once the government has completed its endorsement process (which is expected in Q1 2025), the FCA will consult on moving from TCFD-based reporting to UK sustainability reporting standards-based reporting. At the same time, the FCA will consult on introducing mandatory disclosure of transition plans by listed companies, following the publication of the transition plan framework by the Transition Plan Taskforce in April 2024 (see April’s RoundUp).
M&A – Takeovers – ‘no intention’ is not always good enough!
Panel Bulletin 7 deals with the Takeover Code’s requirements for a bidder to make specific intention statements with regard to a target's business both in its firm intention announcement (the Rule 2.7 Announcement) and the offer document. The Takeover Code requires a bidder to explain the long-term commercial justification for the offer and to state its intentions regarding certain specific aspects of the target's business, including strategic plans for the target, continued employment of employees and management, and any changes to material changes in terms and conditions of employment.
If the bidder does not intend to make any such changes to the target’s business, or if it considers that its strategic plans will have no repercussions on employment or the location of the target’s places of business, it must make a negative statement to that effect. These disclosures allow the target board and shareholders to take that information into account in order to reach an informed decision on the bid.
In Bulletin 7, the Panel Executive makes it clear that it expects a bidder will have (i) a business rationale for seeking to acquire the target and will have (ii) intentions for the 12 months following completion. Any statement made by a bidder under Rules 2.7 or 24.2 should:
- be specific and bespoke; and
- appropriately reflect the bidder’s unique business rationale and intentions.
Only by exception, where a bidder has no intention to make any changes in relation to relevant aspects of the target’s business, will it be required to make a negative statement to that effect.
The Panel does not consider arguments to the effect that a bidder has “not formulated any intentions” as an acceptable basis for formulating the required intention statements, for example, the bidder is ‘unsure about expected synergies’, ‘does not envisage a material reduction in employee headcount’ or only intends to conduct a strategic review 12 months after the offer.
National Security and Investment Act - Government response to call for evidence
By way of reminder, the NSI Act introduced a new framework for the review of transactions and investments on national security grounds in the UK with effect from 4 January 2022.
The government has published its Response to the November 2023 Call for Evidence on the impact of the National Security and Investment Act 2021 (NSI Act) on businesses and investors. The response summarises the key issues flagged and sets out the next steps that the government proposes to take, including an updated “Section 3 statement“, which discusses how the power to call in transactions under the Act is exercised, and Market Guidance Notes which aim to improve understanding of how the regime works, including tips for completing notification forms correctly and more detailed guidance on how long the NSI review process will take in practice, as well as some (limited) guidance on how the NSI regime can apply to outward direct investment. The Government will also consult on updating the definitions of the 17 sensitive areas of the economy (for example, Artificial Intelligence and Advanced Materials), and on introducing exemptions for certain transactions.
GOVERNANCE AND ENGAGEMENT
"Enhancing Investor-Company Dialogue" with the Investor Forum
‘Relationships matter’ was the clear message that resonated during the Society’s latest joint event with the Investor Forum, continuing our ongoing ‘Bridging the Gap’ Dialogue.
Throughout the discussion, both corporates and investors reiterated the importance of understanding the purpose of any engagement. Sallie Pilot summarised the following 5 simple yet essential principles of effective communication and collaboration they shared:
1. Take Time to Understand One Another: Allocate time to genuinely understand the perspectives and interests of the other party.
2. Ask Questions and Listen Attentively: Engage in active listening and ensure that all voices are heard.
3. Know Who Will Be Present: Understand who will be attending and their specific interests in any meeting.
4. Respect Everyone's Time: Everyone is time poor. Value the time of all participants, especially management, by being concise and to the point.
5. Allocate Time for Feedback: Ensure there is time set aside for providing and receiving feedback.
For more detail on the discussion, see Sallie’s full blog here, and for more details on what you can do as a company to improve the effectiveness and efficiency of your relationships see our recent blog here.
ACTIONS for INVESTORS
As part of our ongoing Bridging the Gaps between Companies and Investors dialogue with The Investor Forum, Sallie Pilot has also compiled the following lists of things that companies would really love investors to do, or do better, to make relationships stronger and more valuable.
Top 5 actions to improve the EFFECTIVENESS of dialogue
- Provide greater transparency to companies on which funds are invested in the company, and which are passive.
- Encourage joined-up meetings with governance specialists, ESG experts, portfolio managers and, where appropriate, fixed income investors.
- Make access easy - set up a corporate access desks to facilitate broader access and coordination across organisation (and maintain a generic contact @ email).
- Create targeted summaries that describe your approach and one page expectation documents on specific issues - voting policies, diversity, human rights policy) to complement stewardship reports
- Instigate reverse road shows to explain structure, approach and key focus areas (e.g, leverage Stewardship reporting), and provide clarity on key issues of interest for companies
Top 5 actions to improve the EFFICIENCY of dialogue
- Engage with companies directly on key issues or areas where you want to learn more, especially regarding what appears in their reporting
- Deliver a consistent message, so a company hears the same thing from portfolio managers and stewardship teams.
- Invest time in understanding the nuances behind the numbers and metrics presented by companies.
- Collaborate with other like-minded investors on key issues to amplify the collective voice and influence.
- Encourage companies to prioritise the three or four issues relevant to the company's business.
For the Top 10 tips for companies, see my previous blog ‘Bridging the Gap’ with the Investor Forum.
FTSE Women Leaders Review 2024
In case you missed it, this report indicates that gender balance is in sight, outlining the latest insight and progress in delivering gender balance across FTSE 350 and 50 of the largest private companies.
FTSE Women Leaders Review February 2024 Report
FCA hits pause on D&I in the financial sector
The FCA has confirmed that it will be hitting pause on its data collection and diversity and inclusion proposals set out in its September 2023 consultation, but will be pressing ahead with other proposals relating to non-financial misconduct.
Nikhil Rathi, Chief Executive of the FCA, noted that the regulator needs more time to consider the D&I proposals given the complexity of the matters they are seeking to address and the potential impact the proposals could have on businesses and diversity and equality more broadly across the sector.
By way of reminder, the proposals included new rules and guidance requiring in-scope firms to develop diversity and inclusion strategies, collect, report, and disclose diversity demographic data, and set targets to address under-representation.
SUSTAINABILITY REPORTING
Timetable for UK Sustainability Disclosure Requirements
The Government published an implementation update to their Sustainability Disclosure Requirements (SDR), including an endorsement and implementation process for IFRS Sustainability Disclosure Standards, Transition Plan Disclosures and UK Green Taxonomy, among other updates.
The government is aiming to make UK Sustainability Reporting Standards (UK SRS) available in Q1 2025, allowing the FCA to use the UK SRS to introduce sustainability reporting requirements for UK-listed companies in 2025. The FCA consultation, originally planned for the H1 2024, is now expected in early 2025 and will also cover listed company transition plan disclosure. Meanwhile, the FCA continues to encourage companies to take steps to voluntarily report against the ISSB standards.
A decision by the Government on disclosure requirements for other companies is expected in Q2 2025, although these would become effective no earlier than January 2026.
Further details on the process to develop the UK SRS are set out in a separate Policy Paper, and the FCA’s proposed timetable is in Primary Market Bulletin 49.
As mentioned in my introduction above, the recent election announcement means the planned consultations on Transition Plan Disclosure and the UK Green Taxonomy will not be released until a new Government has been formed.
UK Net Zero Business Census
The first UK Net Zero Business Census has been delivered by the UK Business Climate Hub. The initiative aims to establish a definitive benchmark for the private sector's contribution to the UK's national 2050 net zero target through gathering a dataset of UK organisations' progress on net zero. You can read more, and access the Census here until 30 June 2024.
Government's climate change plan found to be unlawful (again)
The High Court has found the government's Carbon Budget Delivery Plan to be unlawful, as it was based on reasoning rather than being justified by the evidence, in Friends of the Earth & Ors v Secretary of State for Energy Security and Net Zero [2024] EWHC 995 (Admin).
The plan formed part of the statutory process set out in the Climate Change Act 2008 to achieve net zero by 2050. It follows a similar finding in 2022 in relation to the government's Net Zero Strategy. The government is now expected to go back to the drawing board for a third time to produce a report that meets its statutory obligations in relation to climate change.
Read more in this HSF blog
Corporate Sustainability Due Diligence Directive approved
The Corporate Sustainability Due Diligence Directive (CS3D) has been given final approval by the EU Council and Parliament, and can now be published in the Official Journal of the EU and enter into force 20 days later (after which member states will have two years to transpose it into their national laws). The CS3D was significantly watered-down, but will still require monitoring and remediation of environmental and human rights violations along the value chains of the largest companies operating in the EU, along with mandatory transition plan disclosure. It also places the onus on companies to carry out meaningful engagement with stakeholders and establish and maintain a notification mechanism and complaints procedure.
See March RoundUp for more detail on which companies will be caught and when.
EU ESRS Interoperability with ISSB Standards
The ISSB and the European Financial Reporting Advisory Group (EFRAG) have published their long-anticipated joint interoperability guidance outlining the degree of alignment between the ISSB Standards and the European Sustainability Reporting Standards (ESRS).
The publication offers help for entities starting with either set of standards to achieve compliance with both sets of standards, so any companies aiming to achieve compliance with both the ISSB standards and European Sustainability Reporting Standards (ESRS) should find it a helpful resource.
ESRS Implementation Guidance
EFRAG has finalised its first three Implementation Guidance documents for the European Sustainability Reporting Standards (ESRS), reflecting the outcome of consultations on Materiality Assessment, Value Chain and ESRS Datapoints.
By prioritising these documents, EFRAG aims to support undertakings and other stakeholders in the implementation of the ESRS, helping them to focus on the aspects of the standards that are more relevant to them and illustrating the reporting requirements with practical language and FAQs.
EFRAG has also published the third set of 44 technical explanations to assist stakeholders in the implementation of the sector-agnostic ESRS. The explanations are grouped in chapters according to their nature (Cross-cutting, Environment, Social, or Governance) and their Disclosure Requirements, following the ESRS’ architecture, and EFRAG has now published a compilation of all 68 of its responses to stakeholders’ technical questions on the ESRS.
Key takeaways include that:
- subsidiaries that are excluded from the financial statements (e.g., due to national accounting laws) may still need to be included within the boundaries of the consolidated CSRD statement if material (ID 148). Therefore, the scope of CSRD reporting is potentially wider than the scope of financial reporting.
- it is not permissible to report metrics (such as, for example, energy consumption) for a period that deviates from the financial year (ID 286);
- material metrics must be reported, even if there is a high degree of uncertainty over the data of the metrics - in which case, estimates must be reported, along with information about the sources of uncertainty and any assumptions/judgments made (ID 504); and
- the ESRS do not prescribe any specific documentation for explaining the setting of thresholds for the materiality assessment, and disclosing or explaining each threshold separately is not required in all circumstances. epending on the circumstances, the description and disclosure of thresholds may be more or less granular (ID 517).
Compilation of ESRS Implementation Q&A
EU Funds: ESMA guidelines on fund names using sustainability-related terms
To help tackle greenwashing, the European Securities and Markets Authority (ESMA) has published the guidelines on fund names using ESG or sustainability-related terms. This clarifies what investors may expect in terms of policies, practices and characteristics of funds consistent with sustainability standards, and the circumstances where a fund name with ESG or sustainability-related terms is indicative of unfair, unclear or misleading practices.
The guidelines apply immediately for new funds, with existing funds being given six months following the publication of the guidelines to comply.
GRI Interoperability with ISSB Standards
The IFRS Foundation and Global Reporting Initiative (GRI) have announced they will work together to optimise how GRI and ISSB Standards can be used together. The ISSB and GRI will work together jointly identify and align common disclosures that address the information needs for stakeholders, including investors. An initial outcome will be pilot based on the GRI101 Biodiversity Standard and the ISSB's upcoming project on Biodiversity, Ecosystems and Ecosystem Services.
Building upon the Memorandum of Understanding signed in 2022, this collaboration will seek to provide a seamless, global and comprehensive sustainability reporting system for companies looking to meet the information needs of both investors and a broader range of stakeholders. The increased collaboration will optimise how GRI and ISSB Standards can be used together to facilitate reporting on an organisation’s impacts, risks and opportunities, including risks that arise from the organisation’s impacts.
Landmark US ruling on human right to healthy environment
The Inter-American Court of Human Rights (IACHR) has issued a landmark decision, finding that Peru breached its obligation to protect the right to a healthy environment (among other human rights) of the community of La Oroya, when failing to protect the community from pollution emitted from a metallurgical smelter. The court found that the State of Peru had a duty to prevent human rights violations by private companies, and ordered Peru to adopt and implement measures to ensure that the plant complies with the UN Guiding Principles on Business and Human Rights and implement policies for human rights due diligence and human rights’ protection and remediation measures.
The decision emphasises the state obligation to prevent human rights’ violations by private companies, through the adoption of legislative measures, but also makes clear that companies should have regard to the interactions and interdependencies between environmental protection, biodiversity, human rights and sustainable development (and, in particular, to consider environment-related human rights impacts) as part of their human rights due diligence.
Read more in this HSF blog