Policy RoundUp – October 23

Written By

Icole

Read more here.

Scope 3 reporting – have your say

You now have an opportunity to influence future Scope 3 reporting requirements in the UK, with this call for evidence 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.

Transition plan disclosure

The best practice Disclosure Framework for climate transition plans has been launched, aiming to provide a “gold standard” for companies to develop and report on their nature-positive net-zero climate transition plans. The framework suggests periodic standalone reports that can include information not material to primary users of general purpose financial reports.

In November, the TPT plans to publish Sector Deep Dive guidance for consultation. The sectors will include Asset Managers, Asset Owners, Food and Beverage, Electric Utilities and Power Generators, Metals and Mining, and Oil and Gas. The TPT’s final Sector Deep Dive guidance are expected to be delivered in February 2024, along with an outline of a forward pathway on transition plans.

The Government is expected to consult in December or the New Year on the extent to which companies should be required to follow the framework. The FCA is also due to consult in H1 2024, with an aim for disclosure requirements to be applicable for financial years beginning on or after 1 January 2025 (with reporting from 2026), so the FCA is therefore encouraging listed companies to ‘engage early’ and ‘get started’.

FRC report on materiality and improving corporate reporting

The FRC Lab has issued a series of reports looking at how companies can improve their reporting by taking a more focused, strategic approach to assessing materiality.

"Materiality in practice: applying a materiality mindset" encourages companies to think holistically about what information is material to their stakeholders when preparing annual reports. It provides practical suggestions and examples for identifying material issues, where reporting could be streamlined and prioritising key messages.

“Think about investor needs and decision-making” helps companies to understand how investors use information to make decisions and will help boards and management when making materiality assessments.

The FRC has also outlined its commitment to working with stakeholders on this topic in its statement on the FRC’s approach to materiality.

FRC consolidates reports on ESG data preparation and usage

The FRC has produced a summary bringing together the tips from the FRC Lab's reports on ESG data production and distribution and consumption: “From production to output: how companies can improve their ESG data practices”. This summary of recommendations will help companies improve their ESG data practices for effective collection and use internally, as well as by investors. Key insights include identifying what data is needed, applying controls, integrating data into strategy, and engaging investors on priorities. Members are encouraged to read this summary as it provides practical ways for how to improve both collection and reporting of sustainability-related information.

FRC expectations during economic uncertainty

The FRC has set out its expectations for the coming reporting season amidst the current economic background of high inflation, high interest rates and ongoing economic uncertainty.

Whilst the general quality of FTSE 350 corporate reporting has been maintained, the FRC report suggests that companies should take a step back to consider whether the annual report as a whole is clear, concise and understandable, with a robust pre-issuance review undertaken.

The FRC also reviewed directors’ remuneration reporting, identifying issues relating to the clarity of targets and performance/progress, also noting that ESG targets linked to remuneration should be consistent with KPIs in the strategic report (with any differences clearly explained) and with narrative reporting in TCFD reports.

Late filing of digitally tagged reports

As previously reported, 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.

Law Society guidance on climate risk governance and greenwashing risks

The Law Society has published some guidance on climate risk governance and on mitigating the risk of greenwashing.

This guidance is aimed at lawyers but includes a description of what constitutes good climate governance, along with a list of questions to be put to the board, which provides a useful checklist of the areas that should be considered. These include

Business strategy formulation,
Remuneration, Board skills, experience and knowledge, Culture and D&I,
Future planning and risk management, including scenario analysis and stress-testing, and
Processes and systems including disclosure, reporting and Stakeholder management.

This guidance also covers directors’ legal duties in the context of climate risk, and under the Companies Act 2006 and related disclosure requirements, plus it includes definitions of key terms including greenwashing, climate risks and net zero.

CSRD size limits increase and sector-specific standards postponed

The EU Commission is putting forward various proposals to reduce the reporting burden for financial market participants. These include an increase in the size limits for reporting in the EU, including under the Corporate Sustainability Reporting Directive (CSRD), meaning fewer companies will now be caught.

The EC has also proposed that the deadline for sector-specific standards be postponed from 30 June 2024 to 30 June 2026, with in-scope companies having at least a further four months before they become subject to sector-specific sustainability reporting rules. The EC also proposes that the separate third-country standards for non-EU parent companies that are required to report at group level under CSRD will also be issued by 30 June 2026, giving those overseas companies time to prepare before they are due to start reporting in 2029 in respect of FY2028.

Final EU Sustainability Reporting Standards (ESRS)

The EU has now finalised its sector-agnostic Sustainability Reporting Standards (ESRSs), with this first set of twelve ESRSs now applicable for the 2024 reporting period, in time for the first tranche of companies that are required to report under CSRD. (A different set of standards will be developed by June 2026 for those overseas companies that are due to start reporting in 2029 in respect of FY2028.)

EFRAG launches ESRS Q&A Platform

EFRAG has launched a Q&A Platform to collect technical implementation questions from preparers and the wider public on the approved European Sustainability Reporting Standards (ESRS). EFRAG has also released Implementation guidance for the ESRS Data Points/metrics: Download (efrag.org).

Internationalisation of the SASB Standards

Revised draft SASB Standards have been published on SASB.org to allow stakeholders to familiarise themselves with the revisions. The changes are intended to help preparers apply the SASB Standards regardless of their geographic location, operating footprint or applied GAAP, but do not substantially alter the SASB Standards’ structure or intent.

Fatal flaw comments (i.e. any unacceptable defects that would seriously impair application) can be submitted until 10 November. The revisions will not be final until ratified and issued by the ISSB, anticipated in December 2023.

With over 3,000 companies in more than 70 jurisdictions, including 74% of the S&P Global 1200 Index, already applying the SASB Standards, this initiative aims to ensure their ongoing effectiveness in supporting industry-specific sustainability disclosures.

FAQ on sustainability assurance materiality

The International Auditing and Assurance Standards Board (IAASB) has issued an FAQ compilation on how its proposed standard on sustainability assurance addresses materiality. The FAQ compilation addresses 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 organization’s “materiality process” during a sustainability assurance engagement, among other questions and answers.

TCFD 2023 Status Report and FSB 2023 Annual Progress Report

This month, the TCFD released its sixth and final status report. Key findings include:

Ninety-seven (97) of the 100 largest companies in the world have declared support for the TCFD, report in line with the TCFD recommendations, or both.
Over 80% of the largest asset managers and 50% of the largest asset owners reported in line with at least one of the 11 recommended disclosures.

However, more progress is needed – in particular, only 4% of companies disclosed in line with all eleven TCFD recommendations. Future focus areas for the ISSB include developing implementation guidance on climate-related physical risk assessment and adaptation planning, climate-related scenario analysis at a sector or industry level, and Scope 3 GHG emissions measurement at a sector or industry level.

Alongside the TCFD report, the Financial Stability Board ("FSB") published its 2023 Annual Progress Report on climate-related disclosures. This includes the progress made by the ISSB following the introduction of IFRS S1 and IFRS S2 in June, as well as the progress made in the area of assurance.

FCA comments on new competitiveness and growth objective and proposed reforms

The FCA has published a speech focussing on the FCA's new secondary objective to support international competitiveness and growth over the medium to long term. The following were key takeaways:

the importance of long-term vision over short-term tactics to ensure that the UK continues to be a leader on regulation and innovation globally;
the FCA's focus on investing in digital capabilities and infrastructure;
listing and asset management reforms are designed to enhance the UK's competitiveness, reduce complexity and unleash capital for growth; and
the need to take a balanced view of risk in the interests of not stifling innovation.

With regard to the listing reforms, the FCA has received 'good support' for merging premium and standard listing segments, also highlighting the reshaping of Class Transactions, rationalising the related party transaction regime, and other proposals. Final rules will be made in H1 of 2024.

Global AI Safety Summit

This week, the UK is hosting the world’s first AI Safety Summit at Bletchley Park (November 1st and 2^nd), with the aim of bringing together key countries, technology organisations, civil society, academics and industry experts.

The five objectives that will be discussed at the summit are:

a shared understanding of the risks posed by frontier AI and the need for action,
a forward process for international collaboration on frontier AI safety, including how best to support national and international frameworks,
appropriate measures which individual organisations should take to increase frontier AI safety,
areas for potential collaboration on AI safety research, including evaluating model capabilities and the development of new standards to support governance, and
showcase how ensuring the safe development of AI will enable AI to be used for good globally.

The Summit follows the UK’s July 2022 AI Policy Paper and the more detailed AI White Paper in March 2023. More recently, the The Governance of Artificial Intelligence: Interim Report was issued on 31 August 2023 by the UK Science, Innovation and Technology Select Committee, which recently conducted an inquiry into the impact of AI on several sectors. This suggested that a tightly-focused AI bill should be included in the King’s Speech (next week, 7^th Nov) to help position the UK as an AI governance leader.

Read more here: AI Safety Summit| AISS 2023

Meanwhile, the Organisation for Economic Co-operation and Development (OECD) has published a paper on Initial policy considerations for Generative Artificial Intelligence.

The overriding message of the paper is that, whilst Generative Artificial Intelligence offers “transformative potential across multiple sectors such as education, healthcare and scientific research”, these technologies also “pose critical societal and policy challenges” that policy makers must confront: potential shifts in labour markets, copyright uncertainties, and risk associated with the perpetuation of societal biases and the potential for misuse in the creation of disinformation and manipulated content.

Artificial Intelligence in financial services

The FCA and other financial regulators had asked for input on the role supervisory authorities should have in supporting the safe and responsible adoption of AI in UK financial services. A Feedback Statement (FS23/6) has now been issued to summarise the responses to Discussion Paper DP5/22 – Artificial Intelligence and Machine Learning, jointly published in October 2022.

The aim of this FS is to identify themes and provide an overall summary, as well as sharing and gaining feedback on the regulators’ thinking on:

the potential benefits and risks related to the use of AI in UK financial services,
how the current regulatory framework applies to AI,
whether additional clarification of existing regulations may be helpful, and
how policy can best support further safe and responsible AI adoption.

Corporate Crime and changes to register of members

The Economic Crime and Corporate Transparency Act received royal assent last week. The new law is designed to fight corruption, money laundering and fraud, and has significant implications for businesses, including:

a new “failure to prevent fraud” offence, imposing criminal liability on large organisations for wrongdoing committed by staff, agents and some third parties,
enabling businesses to be held criminally liable for the actions of senior managers,
giving Companies House significant new powers, and
powers to seize, freeze, recover and convert crypto-assets (read more).

Register of members:

Companies will also need to collect more information on their shareholders than presently required for the register of members, and will have to provide a one-off list of shareholders to Companies House to be updated annually as part of the confirmation statement process.

Information about beneficial holders will not need to be recorded on the register of members, but the government has committed to a consultation by the end of this year on how to improve the transparency of shares held under trust and nominee arrangements.

IoD Code of conduct for directors

Recent corporate scandals at Carillion, BHS, Patisserie Valerie, P&O Ferries and the Post Office suggest that business conduct does not always meet the standards expected by society.

To address this issue, the IoD is launching a Commission to develop a code of conduct for directors. The Commission will run between September 2023 and March 2024, and report its findings in April 2024.

You can read the press release here: IoD launches Commission to develop a code of conduct for directors | IoD

QCA Governance Code

The QCA has announced that is due to be released on 13^th November, so members who use or advise on the Code should sign up to their launch webinar, which will “help companies gain some insight of the changes to the Code and how they can start the process to check they are applying the 10 principles correctly”. The QCA will also set out how the QCA is providing helpful materials and workshops for companies to update their disclosures.

Digital version of the Takeover Code launched

The new digital version of the Takeover Code is now available on the Takeover Panel website. The digital Code provides greater functionality, including navigation between provisions of the Code, pop-up boxes for defined terms, and tabs linking Rules with related Practice Statements. The website also contains a PDF copy of the Code and allows users to download individual Rules and sub-Rules as PDFs.