Policy RoundUp - May 23

Dear Member,

Despite all the Bank Holidays, May has been another very busy month in Policy! There have been several key consultations issued, so this RoundUp is necessarily rather long.

Firstly,  I would like to encourage our IRO members to respond to the Society's latest survey on the amount/quality of equity research and the FCA's latest proposals to replace the premium and standard segments along with other listing rule changes, circulated by email yesterday (see April’s RoundUp for more detail on those FCA proposals and on the review of equity research). These findings will also feed into our conference on 13^th June. Thank you also to all our IROs who responded to our recent survey on ESG data and ratings – this has provided some great evidence, and we will be publishing the results next week.

A call for evidence on non-financial reporting in annual reports has been issued by the Department of Business and Trade (DBT), in conjunction with the FRC, that examines whether the UK should move to a more streamlined and focused corporate reporting regime.  This considers narrative reporting within the strategic and directors’ reports, in addition to sustainability/ESG reporting (in anticipation of the ISSB standards). Respondents are also invited to comment on other reporting requirements that sit outside the annual report, including gender pay gap and modern slavery reporting. Key questions include:

• whether the 'non-financial' information currently required or provided by companies in their annual reports and accounts is fit-for-purpose and provides decision-useful information to the market, wider stakeholders and by the board of directors of companies themselves?
• How easy, or hard, it is for companies to comply with current requirements, whether there are any difficulties in relation to data collection and what more could be done to make the production and distribution of information easier?

The FRC have published their proposed revisions to the UK Corporate Governance Code, which include audit committee oversight of sustainability reporting, changes to the framework on internal controls and various new reporting requirements. Key changes include:

• Directors would be required to make a declaration on whether they can reasonably conclude that risk management and internal controls systems (covering operational, compliance and reporting controls) have been effective throughout the period and up to the date of the ARA; set out the basis for that declaration, and describe any material weaknesses or failures identified, the remedial action being taken and over what time frame;
• Expanding the remit of the Audit Committee to include monitoring integrity of narrative reporting, including sustainability matters and reporting on related significant issues and the development, implementation and maintenance of an audit and assurance policy;
• A requirement to introduce and discuss malus and claw back arrangements and report on whether these have been used in the last five years; and
• A number of other enhancements to reporting requirements, including describing emerging risks, discussing how effectively the desired culture has been embedded and listing out significant director appointments.

Following the FCA's latest listing rule proposals (see April’s RoundUp), the FCA has this month published its proposals for the revised Prospectus regime. Key topics include:

• the information requirements for a prospectus on an admission to a regulated market, including, in particular, the rules on complex financial histories and summaries;
• whether the current exemptions to the need for a prospectus should be retained or amended;
• when a prospectus should be required on a secondary issuance; and
• how to define and label forward looking information in prospectuses, with a new liability regime.

The CGI has released a report on tackling greenwashing from a governance perspective considering the risks of greenwashing for organisations and setting out a framework for governance professionals to build 'greenwash-proof' organisations.

The QCA has published the results from a couple of recent studies, one looking at investor attitudes towards ESG that indicates that investors are favouring Main Market companies over those quoted on AIM or Aquis Stock Exchange growth market, and another looking into the critical role of non-executive directors, particularly for young, growing companies, especially in light of the perceived shift in the risk/reward status of taking on a non-executive directorship in the UK that has meant it has become harder to hire NEDs.

The ISSB is seeking feedback on its proposed methodology to enhance the international applicability of the SASB Standards before January 2024, when the ISSB standards will come into effect. Meanwhile, SBTi has released the first corporate science-based targets for nature, which build on and complement existing climate targets.

Finally, the Takeover Panel is consulting on proposed increased flexibility for target company ‘frustrating action’.

I hope to see many of you at the conference!

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

FCA engages on new rules for Prospectuses

The FCA has started to publish a series of engagement papers to shape discussions with market participants to assist with its update of the public offer and admission to trading regime, including the rules on when a prospectus will need to be published and what it will have to include.

Thematic engagement papers (in place of one large consultation) have been published on the rules for:

• prospectuses for admission to regulated markets - The FCA says the requirement for a prospectus for an IPO will remain and it will continue to need to contain sufficient detail to meet the 'necessary information' test. The FCA is asking for views on when exemptions to this requirement should apply, the required content and format of a prospectus in this context, and the responsibility for, and approval of, such a prospectus. The FCA also asks whether to introduce specific requirements for ESG disclosures, currently left to issuers to determine under the general ‘necessary information’ test along with enhanced expectations for disclosure of risk factors.
• prospectuses for secondary issuances - For existing listed issuers, a public offer will not of itself require a prospectus unless there is a clear reason to have one (i.e. investor protection). The FCA also asks whether there should be a threshold (being a percentage of existing share capital) for the requirement to publish a prospectus on a further issuance and what document (if any) should be required if/where a prospectus is not required. The FCA is also seeking views on how to scale back current requirements and make disclosure more proportionate/less duplicative.
• forward looking statements, which will benefit from a new liability regime, under which the safe harbour from prospectus liability will be expanded to cover forward-looking statements made by those who are not reckless; and
• prospectuses for non-equity.

Responses to the questions raised by the engagement papers are sought by 29 September 2023.

FCA feedback from this process is expected to be published in October and a formal consultation process is scheduled for the first quarter of 2024. It is anticipated that the final regime will become effective in 2025.

The FCA has set up a new webpage on the public offer and admissions to trading regime which includes information about the engagement process for the proposed reforms.

There is a detailed briefing available here.

DBT seeks views on ways to streamline non-financial reporting

The Department for Business and Trade has published a call for evidence seeking views on the non-financial information UK companies are required to include in their annual reports. The call for evidence seeks views on:

• The costs and benefits of producing non-financial information, the value of the information produced, and how the non-financial reporting regime might be improved in the future.
• Whether the thresholds in Part 15 for categories of economically significant companies should be rationalised and simplified. These include quoted and traded companies, AIM companies and large private companies, with a variety of employee and/or turnover thresholds.
• What investors and other stakeholders see as the priorities for the UK's future non-financial reporting framework.
• The best way to integrate standards introduced by the International Sustainability Standards Board into the UK's reporting framework.
• The different reporting requirements that stakeholders are subject to (such as modern slavery and gender pay gap reporting) and how these fit within wider non-financial reporting frameworks.

The online questionnaire supporting the call for evidence is available here.

A non-exhaustive list of the provisions in scope of the review is available here.

The deadline for responses is 16 August 2023. Once responses have been received the government will develop proposals for public consultation in 2024.

FRC consults on the UK Corporate Governance Code

The FRC has launched its consultation on revisions to the UK Corporate Governance Code, which will implement the reforms outlined in the government’s 2022 response statement  to the 2021 White Paper on restoring trust in audit and corporate governance. 

The most significant proposed changes relate to audit, risk and internal control. They aim to strengthen internal control frameworks and align the Code with the government’s proposals for a new resilience statement and audit and assurance policy. Other proposed amendments aim to address areas of weak reporting identified by the FRC’s annual corporate governance reviews. In particular, the FRC is proposing that companies should focus more on outcomes to demonstrate the impact of their governance practices. This is to drive improvements in the way companies disclose how they apply the principles of the Code.

The FRC is also proposing an additional responsibility for the audit committee to engage with shareholders and other stakeholders as the FRC’s reviews of corporate governance reporting have revealed insufficient engagement between the two. 

The FRC also recently published its Standard on audit committees (see below), and the Code contains a number of identical provisions in relation to audit committee responsibilities and reporting. The FRC proposes to remove the duplication from the Code and require audit committees to follow the Standard. Although this will bring all premium-listed companies within the scope of a standard that applies to FTSE 350 companies only, the FRC notes that two sections of the Standard were previously included in the Code and the majority of the remaining sections were developed using existing legislation and guidance. 

Other key changes include:

• ESG reporting - the FRC proposes requiring the board to describe how environmental and social matters are taken into account in the delivery of strategy, including the company’s climate ambitions and transition planning; Expanding the audit committee’s responsibilities to include the monitoring of narrative reporting, including sustainability reporting; and Requiring the audit committee to report on the significant issues it has considered in this area and how they were addressed and, where commissioned by the board, to report on the assurance of ESG metrics and other sustainability matters.
• Diversity  - the FRC proposes amendments to facilitate a more joined-up approach to diversity and inclusion and to support (and avoid duplicating) the 2022 changes to the Listing Rules that require reporting and disclose against targets on the representation of women and ethnic minorities on boards and executive management. The proposals include: Requiring board appointments and succession planning to take into account wider characteristics of diversity, moving away from a specified list of characteristics; and Requiring the nomination committee to report on succession plans for both board and senior management and on the effectiveness of the diversity and inclusion policy.
• Board performance reviews - the FRC is proposing to replace references to “board evaluation” with “board performance review” to emphasise the continuous process of self-improvement (rather than backwards-looking assurance).
• Overboarding - in light of increased concern from investors about the number of board positions held by executive and non-executive directors, the FRC is seeking feedback on whether annual board performance reviews should consider each director’s commitments to other organisations and whether all significant director appointments should be disclosed in the annual report. Any such disclosures should describe how each director has sufficient time to undertake their role effectively in light of commitments to other organisations and describe any actions taken as a result of this assessment. 
• Remuneration - The FRC proposes to strengthen disclosures regarding malus and clawback arrangements and their use in the last five years. It is also proposing amendments to Code principles to strengthen the links between companies’ remuneration policies and corporate performance in the wider sense, including ESG objectives. The FRC hopes that the amendments will also address the issue of companies basing their pay structures only on market benchmarking methods or the advice of remuneration consultants. Measures to improve the quality of reporting include a more direct approach to describing the remuneration committee’s work.

The FRC is still working on revisions to its supporting guidance to support the new Code (this guidance will be updated once the outcome of the current consultation is known). In the meantime, the FRC seeks views on areas that the guidance could cover (e.g. issues the board should consider when carrying out effectiveness reviews and guidance on reporting against the new provisions). 

The FRC is also hosting a series of roundtables to allow stakeholder engagement on their proposals. 

A version of the proposed revised Code, marked to show the changes, is set out in Appendix A of the consultation document.

The deadline for comments is 13 September 2023, and the finalised revised Code will apply to accounting periods commencing on or after 1 January 2025. 

FRC finalises minimum standard for audit committees

The Financial Reporting Council has published a minimum standard on external audit for FTSE 350 audit committees, together with a feedback statement on the responses to the consultation draft.

Until ARGA gets the necessary powers to issue a mandatory standard, the new standard is voluntary and will operate on a comply or explain basis.

The standard applies with immediate effect to audit committees of FTSE 350 companies and should be read in conjunction with the UK Corporate Governance Code and the FRC Guidance on Audit Committees. Other companies do not need to apply the standard but may do so if they wish. In particular, companies subject to mandatory tendering and rotation of audit firm appointments may find it helpful as the provisions are examples of good governance.

The standard is substantially the same as the draft version on which the FRC recently consulted. It focuses on FTSE 350 audit committee responsibilities that relate to external audit. The title of the standard has been amended to emphasise the focus on external audit and the section on the audit committee's role in relation to oversight of the external audit has been expanded, taken from the FRC Guidance on Audit Committees.

Click here for the standard and here for the FRC's feedback statement.

CGI publishes report on greenwashing from a governance perspective

The Chartered Governance Institute UK & Ireland (CGI) has published a report on tackling greenwashing from a governance perspective, placing greenwashing in a governance context and considering the different forms of greenwashing, the legal and regulatory framework and the risks of greenwashing for organisations.

The report sets out a framework for governance professionals to build 'greenwash-proof' organisations and highlights key principles that governance professionals should embed into their work and their sustainability efforts.

QCA research: Are investors “Asking the Earth”?

This QCA report follows a survey of investor attitudes towards ESG, supported by Inspired and CMS. The study indicates that investors are favouring Main Market companies over those quoted on AIM or Aquis Stock Exchange growth market, suggesting that this could be primarily due to challenges in the ability to compare data between companies and incomplete data from the small and mid-cap community. Some of the key findings include:

• The role of ESG in investment decisions continues to grow. Compared to three years ago, four-fifths report greater focus on strong ESG credentials in their small and mid-cap investment strategy, and just under two-thirds of investors have seen a corresponding positive effect on their returns.
• Nine in ten investors believe it is important to understand how a company defines its ESG issues or provides a materiality assessment and that quantitative data on their ESG KPIs is disclosed.
• When quantitative data is not available to be disclosed, almost half of investors value qualitative disclosures, but the other half of investors say it depends on the company.
• Regarding timeframes, almost half of investors expect detail for the past five years or more when thinking about historic performance, and looking forward two-thirds expect projections for ESG plans over a similar three-to-five-year timescale.
• Over two-thirds of investors say that companies should look to provide a clearly-tailored sustainability strategy alongside their focus on each pillar of ESG.

QCA report is available here

FinnCap/QCA Survey of Non-executive directors

A recent finnCap/QCA survey of non-executive directors asked some big questions about how growth companies can gather the best people around the boardroom table and found that, in respect of smaller quoted company NEDs:

• the role differs from being a NED in larger and more mature businesses;
• there needs to be a conversation around remuneration, on the basis that:
  • the time involved typically exceeds the contracted commitment;
  • the work required and risk profile has increased significantly in recent years;
  • average remuneration is not considered representative of the work and risk profile attached to the role;
  • remuneration packages are perceived to be higher in other markets (public and private); and
  • a significant number of NEDs are turning roles down.
• Further work is required in order to promote diversity in the boardroom.

Critically, the perceived shift in the risk/reward status of taking on a non-executive directorship in the UK has meant that it has become harder to hire - and hire the right people with the right experience.

Notably, a number of respondents commented that a key skill for a smaller quoted company NED is strategic insight. finnCap and th QCA believe this goes some way to illustrate the critical role that NEDs can play, particularly for young, growing companies. This in turn highlights the importance of having a deep pool of talent.

International applicability of SASB Standards

The International Sustainability Standards Board (ISSB) is seeking feedback on its proposed methodology to enhance the international applicability of the SASB Standards before January 2024, when the ISSB standards will come into effect. Currently, around 20% of SASB metrics refer to specific jurisdictional laws and regulations, and revising these references will help improve international applicability and remove regional bias. The consultation is open for comments until Wednesday 9 August 2023. The press release is available here.

SBTi targets for nature

The Science Based Targets Network has released the first corporate science-based targets for nature, which build on and complement the existing climate targets that have been set by over 2,600 companies through the Science Based Targets initiative (SBTi).

This first release from SBTN equips companies to assess their environmental impacts and set targets beginning with freshwater and land enabling companies to both reduce their negative impacts and increase positive ones for nature and people. Specifically, the first nature targets will help companies improve their impacts on freshwater quality (specific to nitrogen and phosphorus) and freshwater quantity as well as protect and restore terrestrial ecosystems.

In 2023, an initial group of 17 companies are piloting the target validation process as well as the land methods which are currently in beta. This pilot will be of critical value towards the rollout of the target validation process and delivery of a version 1 of the land targets, both of which are anticipated to be available in early 2024 after incorporating insights from the pilot.

Useful links

• HOW COMPANIES CAN NOW TAKE ACTION
• MAY 24 LAUNCH WEBINAR
• RESOURCES LIBRARY
• GENERAL FAQS

Takeovers - Proposed flexibility on ‘frustrating action’

The Takeover Panel is consulting on changes to the Rule 21 restrictions on frustrating actions (PCP 2023/1). Rule 21 restricts the board of a target company from taking certain frustrating actions without shareholder approval. The proposes amendments would provide more flexibility for target companies to carry out activities such as share issues and buybacks, disposals and acquisitions of material assets, and the entering into or amending of contracts, provided they are not outside the ordinary course of the company’s business. Other proposals include changes to the rules on equality of information provided to competing bidders. The consultation closes on 21 July 2023, with a Response Statement due in Autumn 2023 and changes will come into effect one month thereafter.