Dear Member,

As the COP28 ‘global stocktake’ begins in Dubai, it is timely that the FCA has finally published its Sustainability Disclosure Requirements (SDR) and investment labels regime, which will influence the information and reporting needs of many investors. The FCA supporting guidance states that asset managers should also consider disclosing their impact on the environment and/or society, having regard to the GRI Standards, and the FCA is consulting on guidance to support its new anti-greenwashing rule.

I also note that the SDR’s first reporting deadline for scope 3 greenhouse gas emissions is 30 June 2024, so our snap poll on Scope 3 emissions reporting is topical - please could IRO members respond ASAP (the IRO questionnaire available here) - we have extended the deadline to close this coming Monday 4th December. The results will inform the Society's response to the Government's call for evidence on Scope 3 reporting. 

Last week we saw the Autumn statement, which included measures intended to support the UK capital markets by giving pension funds access to UK science, technology and growth companies. The chancellor also referred to the recent letter updating the FRC’s remit, emphasising the role the FRC should play in promoting growth and competitiveness, and welcomed the Capital Markets Industry Taskforce work to reset culture through an updated ‘issuer and investor covenant’.

In the wake of the Government’s recent U-turn on resilience reporting requirements (see October’s RoundUp), the FRC has scrapped or postponed most of its proposed revisions to the Corporate Governance Code, with substantive changes limited to some revised 'more targeted and proportionate' Code requirements in relation to internal controls. Meanwhile, the new QCA Corporate Governance Code, which is followed by many AIM companies, was published this month.

The FRC’s latest Annual Review of Corporate Governance Reporting found ongoing improvements in the quality of reporting against the UK Corporate Governance Code, but also identified areas where many companies are still falling short, in particular in relation to risk assessment and internal controls. The FRC is also calling for better communication on the impact and outcomes following stakeholder engagement/feedback.

As mentioned in several previous RoundUps, a surprisingly high number of listed companies continue to miss the deadline for filing their digitally tagged reports with the NSM (within four months of their year end), despite this being a DTR requirement, so companies need to ensure they build in sufficient time for the tagging process.

The IAASB’s consultation on their proposed draft International assurance standard for sustainability reporting closes tomorrow, if you wanted to submit comments.

For those looking for inspiration for their sustainability reporting, Forico has produced an illustrative example of an integrated climate and nature sustainability report aligned to both TCFD and TNFD.

Finally, following the AI Safety Summit at the beginning of the month, some international guidelines have been issued to help ensure the secure development of AI technology.

Well done to all the worthy winners of our Best Practice Awards!

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

The IR Society Best Practice Awards

Save the Date – IR Society Conference – Wednesday 12^th June 2024

SDR investment labels and FCA anti-greenwashing policy

After extended delays to consider industry feedback, the FCA has now published Policy Statement PS23/16, containing final rules and guidance on its Sustainability Disclosure Requirements (SDR) and investment labels regime. The package of measures includes:

• an anti-greenwashing rule for all authorised firms (ESG 4.3.1R, see below, with implementation delayed until 31 May 2024);
• an additional fourth “sustainability” investment label (see below);
• new rules and guidance for firms marketing investment funds on the basis of their sustainability characteristics; and
• detailed information in pre-contractual, ongoing product-level and entity-level disclosures aimed at institutional investors and consumers wanting more information.

The final SDR rules are largely similar to those the FCA previously consulted on, but with some changes to reflect industry feedback. In particular:

• a fourth label of “Sustainability Mixed Goals” has been introduced for multi-strategy products that didn’t neatly fit within the other 3 labels.
• discretionary portfolio management has been excluded for the time being (the FCA intends to consult on labelling proposals for discretionary portfolios in Q1 2024), and
• the ‘naming and marketing rule’ (which the industry thought was too restrictive) has been relaxed, allowing retail funds that do not qualify for a label to use ESG terms (such as ‘green’, ‘net-Zero’, ‘responsible’) in their names or marketing documents provided certain conditions are met (akin to the EU’s SFDR pre-contractual and reporting requirements). However, no fund may include the word “sustainable” or “impact” in its name if it does not use a label.

Regarding the requirements for sustainability-related reporting, additional disclosures will be required where asset managers offer products using sustainability labels or sustainability-related terms in product names or marketing. However, all UK regulated asset managers (regardless of whether their funds use the sustainability labels or not) will be required to publish an entity level sustainability report on how they manage sustainability risks and opportunities within their governance, strategy, risk management, and metrics and targets (akin to TCFD disclosures). The FCA also agreed with some respondents that disclosure of a firms’ impacts on the environment or society would be useful for clients and consumers, so the FCA has added a Handbook guidance provision stating that firms should consider disclosing their impact on the environment and/or society, having regard to the GRI Standards.

The new anti-greenwashing rule (ESG 4.3.1R) requires all FCA-authorised firms to ensure that any reference they make to the “sustainability characteristics” of their financial products and services is:

• consistent with the sustainability characteristics of the product or service; and
• clear, fair and not misleading.

Sustainability characteristics can relate to environmental or social aspects. The FCA has also issued a consultation (GC23/3) on the accompanying anti-greenwashing guidelines (closing 26^th January). The draft guidelines set out four requirements for sustainability claims, which should be:

• correct and capable of being substantiated;
• clear and presented in a way that can be understood;
• complete – they should not omit or hide important information and should consider the full lifecycle of the product/service; and
• fair and meaningful in relation to any comparisons to other products or services.

Regarding timetable, implementation will be staggered with:

• the anti-greenwashing rule and guidelines become effective from 31 May 2024;
• in-scope firms able to use the investment labels from 31 July 2024;
• the ‘naming and marketing’ rules coming into force from 2 December 2024;
• the ongoing product-level and entity-level disclosures for firms with AuM in excess of £50bn coming into force from 2 December 2025; and
• entity-level disclosure rules extended to firms with AuM over £5bn from 2 December 2026.

Scope 3 reporting - final call for views

IRO members, please respond ASAP to our snap poll on Scope 3 emissions reporting (IRO questionnaire available here), which will inform the Society's response to the Government's call for evidence on Scope 3. We have extended the deadline to close on Monday 4th December.

Members may also wish to submit their own evidence to the Government's call for evidence on Scope 3, to help Government decide whether to endorse the ISSB standards (IFRS S1 and S2) in the UK - it closes on 14th December. The call for evidence is seeking views on:

• the costs, benefits and practicalities of Scope 3 greenhouse gas emissions reporting in the UK, to help inform the government’s decision on whether to endorse the ISSB standards in the UK, and
• the current SECR framework to inform a Post-Implementation Review of the policy.

Read more here: Call for evidence on Scope 3 reporting

What did the Autumn Statement mean for IR? 

Wednesday's Autumn statement included some measures that will be of interest, mainly at the smaller/growth end of the market, as follows:

• the government accepted the recommendations from the Harrington Review of foreign direct investment into the UK, aimed at boosting overseas investor confidence in UK equities,
• committing £250 million to 2 successful bidders in the Long-term Investment for Technology and Science (LIFTS) initiative, which will provide new investment vehicles tailored to the needs of pension funds, aimed at generating over a billion pounds of investment from pension funds into UK science and technology companies,
• establishing a Growth Fund within the British Business Bank (BBB) to draw upon the BBB’s expertise and a permanent capital base of over £7 billion, to give pension funds access to investment opportunities in the UK’s most promising businesses, and
• re-confirming the government’s commitment to implementing Rachel Kent’s Investment Research recommendations, with formal consultations in 2024. These include establishing a Research Platform to help generate investment research, allowing greater access to investment research for retail investors.

The government also welcomed the Capital Markets Industry Taskforce (CMIT) work to reset culture through an “investor covenant”, following the recent CMIT open letter suggesting an updated ‘issuer and investor covenant’: “The covenant should emphasise collaboration and the presumption of trust between investors and the issuer boards they have appointed, through the application of the governance and stewardship regimes". This could be supported by a new ‘investor and issuer forum’ "to facilitate more effective ongoing engagement between boards and their shareholders".

In the latest move for Corporate Governance Reform, the Autumn Statement refers to the recent government letter to the FRC updating its remit, emphasising the role the FRC should play in promoting growth and competitiveness.

Read more: Autumn Statement 2023

FRC Code proposals put on hold 

The FRC has announced that most of its proposed revisions to the Corporate Governance Code will either be scrapped or postponed, in light of the Government's recent withdrawal of the proposed new UK reporting requirements for large companies, and the omission of the Audit Reform Bill from the King's speech earlier this month.

However, the FRC still intends to press ahead with revised 'more targeted and proportionate' Code requirements in relation to internal controls, differentiating them further from SarbOx and allowing more time for implementation. 

The pared down revised Code is expected in January, with a fuller overhaul of the Code postponed while the Government conducts a wider review of the UK reporting framework.

It is not yet clear whether the REM proposals will be implemented in this iteration of the Code, for example, the proposal that REM policies/metrics support long term strategy and ESG objectives, with associated ARA reporting. The Society had supported this proposal given it is an area of interest for investors and so the increased disclosures would have helped IR departments in their shareholder engagement.  

Read the FRC's full Policy Statement here.

Revised QCA Corporate Governance Code 

The new QCA Corporate Governance Code was published on 13th November. The QCA Corporate Governance Code is used by almost 900 companies, including some traded on AIM, the Aquis Stock Exchange and by private companies that are aiming to float in future.

The QCA is recommending that any company following the QCA Code uses the new QCA Code (2023) for accounting periods commencing on or after April 1 2024 rather than the QCA Code (2018), and companies should update their governance disclosures appropriately.

The new QCA Code (2023) is available to buy here: QCA Corporate Governance Code – The QCA, along with a launch webinar here: Watch: QCA Corporate Governance Code Launch – The QCA.

FRC review of corporate governance reporting 

The FRC’s latest Annual Review of Corporate Governance Reporting has found ongoing improvements in the quality of reporting against the UK Corporate Governance Code, but also identifies areas where many companies are still falling short.

The review showcases high-quality and insightful reporting by some companies, with the FRC continuing to see more transparent reporting of departures from the Code, rather than simply stating compliance. However, explanations often lack sufficient clarity, and few companies reported to a consistently high standard. The report also found many examples of boilerplate reporting using generic language that fail to meet stakeholder needs for meaningful explanations.

Little improvement was seen in the quality of reporting on risk assessment and internal controls, and more work is needed by most companies to demonstrate robust systems, governance and oversight. However, the FRC was encouraged by the increased focus on workforce engagement and stakeholder reporting, and it would now like companies to show how engagement has lead to high-quality outcomes by better reflecting on the feedback received and its impact on board decisions.

The full report is available here: FRC Annual Review of Corporate Governance Reporting 2023

FCA Rules for Company annual financial reporting in electronic format

As reported in July, the FCA has streamlined its transparency rules for preparing annual financial reports in a specific web browser format (XHTML), and presenting the financial statements in it in the structured digital format. These changes moved key provisions from the Technical Standard directly into the FCA Handbook, deleting the Technical Standard (and the remaining, unnecessary content), and created a simpler and quicker process for staying up to date with generally accepted taxonomies in a new Technical Note.

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

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.

International assurance standards for sustainability reporting

As mentioned in previous RoundUps, the International Auditing and Assurance Standards Board (IAASB) is consulting on the draft International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements. Members may wish to submit comments on this (due by 1^st Dec).

Once finalised, ISSA 5000 will serve as a comprehensive, stand-alone standard suitable for limited and reasonable sustainability assurance engagements. It will apply to sustainability information reported across any sustainability topic and prepared under multiple frameworks. Moreover, the standard will be profession-agnostic, enabling its use by professional accountants and other professionals performing sustainability assurance engagements.

There are also some IAASB FAQ on how the proposed standard on sustainability assurance addresses materiality, addressing a variety of questions including

• how the concept of materiality applies to sustainability reporting and assurance;
• the definition of double materiality; and
• how an assurance practitioner considers an organisation’s “materiality process” during a sustainability assurance engagement.

Global Guidelines for AI Security

In the wake of the world’s first AI Safety Summit at Bletchley Park at the beginning of the month (see October’s RoundUp), the UK government have announced the first global guidelines to ensure the secure development of AI technology.

The Guidelines ‘will help developers of any systems that use AI make informed cyber security decisions at every stage of the development process’.

Given the perils of retrofitting security into AI systems in years to come, it is essential that security is baked into AI systems as they are developed, and not as an afterthought. The Guidelines therefore follow a “secure-by-design” approach to AI, which helps developers ensure that cyber security is both an essential pre-condition of AI system safety and integral to the development process from the outset and throughout.

The guidelines were developed by the UK’s National Cyber Security Centre (“NCSC”) and the US Cybersecurity and Infrastructure Security Agency (“CISA”), in cooperation with industry experts and other international agencies and ministries. A further 16 countries, including Australia, Canada, Japan, and various EU countries have already endorsed the guidelines (full list here).