Firstly, we'd like to extend our congratulations to winners at this week's ProShare Awards. We were proud to support the event and delighted to see many of you pick up awards.
This month, we report on outcomes from COP26 with announcements made by the UK Government and guidance issued by the FCA, FRC and London Stock Exchange following the agreement of the Glasgow Climate Pact.
We also report on corporate re-domiciliation, CGI's FTSE350 Boardroom Bellwether Survey and Glass Lewis' 2022 proxy-voting guidelines.
As always, if you have any questions on the content of this month's bulletin, please get in touch with your Client Relationship Lead, and we'd like to wish you a healthy festive season from all at EQ.
In This Edition:
Climate Change and Sustainability
- Greening Finance: A Roadmap To Sustainable Investing
- Taskforce For Climate Related Disclosures: Ahead Of Mandatory Reporting
- Climate Change Adaptation Report
- Mandatory Climate Related Disclosures
- London Stock Exchange - Climate Reporting Guidance For Issuers
- Mandatory Climate Transition Plans Proposal
- Financial Conduct Authority- Primary Market Bulletin 36
Governance And Reporting
- The FTSE Women Leaders Review
- FTSE 350 Boardroom Bellwether Survey
- Institutional Shareholder Services – 2022 Benchmark Consultation
- Investment Association – Principles Of Remuneration 2022
- Glass Lewis 2022 Policy Guidelines
- Annual Review Of Corporate Reporting
- Structured Electronic Format For Annual Financial Reports
An Insight From Prism Cosec
At the time of writing, COP26 has finished, and not surprisingly, several announcements have been made over the last few weeks from various bodies concerning climate change. The first part of this bulletin focuses on the climate change agenda with announcements made by the UK Government and guidance issued by the Financial Conduct Authority, Financial Reporting Council, and the London Stock Exchange.
Additionally, several consultation documents have been issued relating to corporate re-domiciliation and the effectiveness of the Payment Practices regulations. Also, as we approach the end of the year, guidelines for 2022 have been issued by Glass Lewis and the Investment Association.
Greening Finance: A Roadmap To Sustainable Investing
HM Treasury has published a policy paper 'Greening Finance: A Roadmap to Sustainable Investing'. The document sets out the Government’s intention to “green” the financial system and align it with its net-zero commitment. It is intended that this will be a three-stage process:
- Informing – ensuring decision-useful information on sustainability is available to financial market decision-makers
- Acting – mainstreaming this information into business and financial decisions
- Shifting – financial flows across the economy shifting to align with a net-zero and nature-positive economy
The policy paper focusses on the first area. New Sustainability Disclosure Requirements (SDR) will be introduced which will require certain organisations including listed companies, some financial institutions and occupation pension schemes to disclose information relating to sustainability.
Details of the UK Green Taxonomy have also been released - this is intended to act as a form of dictionary and foster a shared understanding of what activities are deemed ‘green’.
An indication of future consultations has also been published including:
- November 2021 - A series of discussion papers to be published. These will focus on SDR disclosures, consumer-facing product-level SDR disclosures and the sustainable investment labelling regime.
- Q1 2022 - A consultation on climate change mitigation and climate change adaptation criteria under the UK green taxonomy will be published.
- During 2022 - The Government plans on updating the Green Finance Strategy, including setting out an indicative sectoral transition pathway to 2050 to align the financial system with the UK's net-zero commitment.
Read more: Greening Finance: A Roadmap to Sustainable Investing
Taskforce For Climate Related Disclosures: Ahead Of Mandatory Reporting
In advance of the mandatory requirement for premium listed companies to report against the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations on a comply or explain basis in their annual reports, the Financial Reporting Lab (the Lab) has produced a report which intends to assist companies in preparing for mandatory TCFD reporting.
The report includes practical advice and examples that better address aspects of TCFD reporting from those companies already adopting the framework on a voluntary basis.
Additionally, the Lab has also published a snapshot detailing the status of current reporting against the TCFD framework in the UK which highlights the increased uptake in the last year.
Read more: Reporting Framework Snapshots
The report includes several questions that companies should ask of themselves when compiling the report in the areas of:
- Governance and Management: what arrangements does the board have in place for assessing and considering climate-related issues?
- Business Model and Strategy: what strategy has been put in place to reach net-zero or other targets, and what operational or capital expenditures are needed to address any necessary business model changes?
- Risk Management: How are the risks from climate change being monitored, including decisions around mitigation, transfer, acceptance and control?
- Metrics and Targets: what performance information is most relevant to monitoring and managing the impacts of climate-related issues (both on the company and of the company)?
Read more: Taskforce on Climate-related Financial Disclosures (TCFD): ahead of mandatory reporting
One of the major challenges in adopting the TFCD framework is in relation to scenario analysis. The FRC has published a report from the Alliance Manchester Business School which looks at climate-related scenario analysis in more detail. The research highlights the various approaches companies have adopted, instances of good practice, typical challenges faced, and the frequent steps taken to conduct the analysis.
Read more: Climate Scenario Analysis: Current Practice and Disclosure Trends
Climate Change Adaptation Report
The Financial Conduct Authority (FCA) published a report setting out its assessment of how the financial services industry and listed companies are adapting to climate change.
The report notes that listed companies face challenges around making and meeting net zero commitments, in relation to data and information; targets, metrics and methodologies; the impact on business relationships; the interaction with public policy; and divestment versus stewardship. Additionally the report sets out principles for net-zero commitments for listed companies to consider, such as:
- Commitments and targets should be appropriate to companies' business. models and supported by suitable resourcing and governance arrangements;
- Commitments and targets should be realistic and feasible.
- Companies should set targets to measure progress against commitments.
The FCA has also noted that its work on TCFD-aligned disclosure requirements for listed companies interacts closely with similar obligations that BEIS has proposed introducing in the Companies Act 2006. While there are some overlapping elements with in-scope companies, the FCA considers that the two regimes can work effectively together.
Read more: FCA Climate Change Adaptation Report
Mandatory Climate Related Disclosures
The Government has published its response to the consultation on mandatory climate related disclosures, which will apply to publicly quoted companies, large private companies and LLPs.
Disclosure will need to be made from 6 April 2022. The requirements are based on the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and are contained in the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021, which was laid before parliament on 28 October 2021. Separate regulations will be produced for LLP’s once the regulations for companies have been approved.
The proposals largely mirror the consultation issued in March 2021 with two changes:
- There will be a requirement for a qualitative scenario analysis which is meant to assist companies in their assessment of climate related risks and opportunities; and
- The requirements will be more closely aligned with the TCFD recommendations to ensure alignment with requirements introduced by the FCA and the Department of Work and Pensions.
In scope companies will include all relevant Public Interest Entities (PIEs), including UK Premium and Standard listed companies with over 500 employees, UK registered companies with securities admitted to AIM with more than 500 employees, LLPs covered by the “500 test” and UK registered companies which are not included in the categories above and are covered by the “500 test”.
The disclosures required include:
- A description of the company's governance arrangements in relation to assessing and managing climate-related risks and opportunities.
- A description of the principal climate-related risks and opportunities arising in connection with its operations, and the time periods by reference to which those risks and opportunities are assessed.
- A description of the actual and potential impacts of the principal climate-related risks and opportunities on its business model and strategy.
- An analysis of the resilience of the business model and strategy, taking into consideration different climate-related scenarios.
Non-mandatory guidance in relation to the requirements is expected to be published by the end of 2021.
It is anticipated that the new requirements will enable investors and businesses to better understand the financial impacts of their exposure to climate change, and price climate-related risks more accurately, while supporting the greening of the UK economy.
It is also hoped that by applying a common set of requirements aligned with the TCFD recommendations, UK companies will be provided with a uniform way to assess how a changing climate may impact their business model and strategy, and ensure they are well placed to harness opportunities from the UK’s transition to net-zero.
Read more: UK to enshrine mandatory climate disclosures for largest companies in law
London Stock Exchange - Climate Reporting Guidance For Issuers
The London Stock Exchange has issued guidance for London listed companies on the integration of climate reporting best practice and the implementation of the recommendations of the Taskforce of Climate Related Financial Disclosures (TCFD).
The guidance is designed to provide an overview to enable companies to understand the issues, appreciate how these issues could apply in the case of individual companies and the steps to be taken to assemble and report the relevant information. Although the guidance is aimed primarily at listed companies the principles can be applied to any company regardless of sector or size.
A three-step process is suggested to help companies integrate and communicate climate-related information to align with the TCFD’s recommendations.
Step 1: Disclosure diagnosis and context - Companies should ensure that climate-related issues are sufficiently addressed to understand the relevance of climate change and take stock of the current strategy and disclosure practices of each company.
Step 2: Integration of climate-related risks and opportunities - Once the management of a company has recognised the context and need for action on climate change for their organisation, they can begin to integrate climate-related considerations into their risk assessment and strategy development processes.
Step 3: Disclosure of climate-related practices and data - The final step involves communicating the organisation’s understanding through its disclosure of climate-related practices, strategy and objectives to investors and stakeholders.
The report, which is 78 pages long, does contain as an annex to the TCFD Checklist of questions each company should be asking in relation to Governance, Strategy, Risk Management and Metrics and Targets.
Read more: Understanding climate risk and opportunity
Mandatory Climate Transition Plans Proposal
The UK Government confirmed on 3 November 2021 that it would introduce mandatory requirements for certain companies to publish net-zero transition plans setting out how they will decarbonise in the period to 2050.
In its October 2021 policy paper, 'Greening Finance: A Roadmap to Sustainable Investing', the Government indicated that it would require asset managers, regulated asset owners and listed companies to publish transition plans that consider the government’s net zero commitment or provide an explanation if they have not done so. Guidance has been published on what a transition plan is and what will be required in such a plan.
The Government intends to initiate a high-level Transition Plan Taskforce to develop a gold standard for transition plans and associated metrics, which will report by the end of 2022. The Financial Conduct Authority (FCA) will be formally involved and will have regard to the Taskforce's findings. The guidance notes that, currently, there is no commonly agreed standard for a good quality transition plan.
However, the Government notes that any transition plan should include high level targets the organisation is using to mitigate climate risk, including greenhouse gas reduction targets, details of interim milestones and actionable steps a company plans to take to reach these targets.
The guidance does emphasise that there is no requirement to adopt mandatory net-zero targets. It is expected that companies will publish their transition plans in 2023.
Financial Conduct Authority- Primary Market Bulletin 36
The Financial Conduct Authority (FCA) has published their latest primary market bulletin.
The bulletin focuses on specific Task Force on Climate-related Financial Disclosure (TCFD) requirements for listed companies and contains details of FCA expectations relating to disclosure requirements and details their supervisory strategy. The bulletin notes that while the increased disclosure requirements under Listing Rule LR 9.8.RR(8) came into force for premium listed companies for financial years beginning on or after 1 January 2021 there is an intention that the disclosure requirements for most standard listed companies, excluding investment entities and shell companies) will be amended to apply to financial years beginning on or after 1 January 2022.
A draft technical note Primary Market/TN/802.1 – TCFD aligned climate-related disclosure requirements for listed companies is included in the bulletin and comments are invited on this note.
The bulletin recognises that many listed companies will be applying these requirements for the first time and that the FCA will work with the Financial Reporting Council on targeted ‘deep dive’ thematic work specifically designed to assess how companies have complied with the requirements and also identify areas of concern and provide examples of best practice for companies to refer to.
Should a listed company fail to make a statement in their annual financial report regarding the disclosure of climate-related financial information under the TCFD framework, as required by the Listing Rules, they will be requested to publish the TCFD statement via a Regulatory Information Service (RIS) in line with the Listing Rules as soon as possible after this omission is discovered. Any non-compliance with the requirements will be viewed seriously by the FCA and will lead to action using the full suite of powers available to the FCA, as well as sanctions, where appropriate.
Read more: Primary Market Bulletin 36
The FTSE Women Leaders Review
BEIS has announced that the UK Government will support a new five-year review to monitor women’s representation in the upper echelons of FTSE companies, namely The FTSE Women Leaders Review, and encourage firms to open opportunities to everyone.
The review will focus not just on membership of boards but also on senior leadership roles. The FTSE Women Leaders Review follows on from the Hampton-Alexander Review, which published its final report in February 2021.
Additionally, the new FTSE Women Leaders Review opened its online portal for FTSE companies to submit their gender diversity data. The next annual report on gender diversity will be published in February 2022.
Read more: Ministers renew efforts to increase opportunities for talented women at top of UK business
FTSE 350 Boardroom Bellwether Survey
The Chartered Governance Institute (CGI) in association with the Financial Times has, after an almost two-year break, published the latest edition of the FTSE350 Boardroom Bellwether Survey. 51 FTSE 350 companies responded to the survey with some of the highlights being:
Economic outlook - 96% of respondents expected a recovery in the global economy with 79% expecting a recovery in the UK economy.
Climate change - 28% of companies chose climate change as their major risk factor ahead of cyber-risk (23%) and pandemic related risks (17%). 57% of companies had stated their ambition to be net zero as at the date of the survey.
Employees – 24% of companies expected to increase their UK workforce over the next year with 59% reporting that they had no plans to do so. 86% of companies were planning changes to office- based working as a result of the pandemic.
Workforce Engagement- 43% of companies have a designated non-executive director representing workforce interests on the board. 2% have an employee on the board; 8% have a works council or something similar; 20% have something else and 25% have a combination of one or more of the options and/or their own bespoke solution to the issue.
Read more: FTSE 350 Boardroom Bellwether Survey
Institutional Shareholder Services – 2022 Benchmark Consultation
Institutional Shareholder Services (ISS) issued its 2022 benchmark policy consultation, seeking views on its proposed new and amended voting policies for 2022. The consultation closed on 16 November with policy changes being announced shortly afterwards with revised policies applying to shareholder meetings held on or after 1 February 2022.
For the UK and Ireland voting policies, ISS specifically sought views on:
- An additional policy on board ethnic diversity. ISS will generally recommend against the nomination committee chair (or other directors on a case-by-case basis) if the company is a FTSE 100 constituent and has not appointed at least one ethnic minority background director. Additionally, there is an expectation for FTSE 250 and FTSE SmallCap constituents, as well as AIM companies with a market capitalisation over £500 million, to appoint at least one ethnic minority background director by 2024. This excludes investment companies
The addition of non-financial ESG performance conditions to the remuneration policy.
- A new policy on board accountability on climate. For companies that are significant greenhouse gas (GHG) emitters, ISS generally recommends to vote against or withhold from the responsible incumbent director, committee, or full board where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the larger economy. It outlines the minimum steps to understand and mitigate those risks for 2022
For its policies for all markets, ISS sought views on:
- A new policy for a say on climate management proposals. ISS recommends case-by-case votes on management proposals that request shareholders to approve the company's climate transition action plan, considering the completeness and rigour of the plan
- A new policy for a say on climate shareholder proposals. ISS recommends case-by-case votes on shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan and provide shareholders the opportunity to regularly express approval or disapproval of its GHG emissions reduction plan
Read more: ISS Launches Open Comment Period for 2022 Proposed Benchmark Voting Policy Changes
Investment Association – Principles Of Remuneration 2022
The Investment Association has published a revised version of its principles for executive remuneration for 2022.
The updated guidance includes revised sections on pensions, environmental, social and governance (ESG) performance measures and a new section on value creation plans.
Read more: Principals of Remuneration
Glass Lewis 2022 Policy Guidelines
The 2022 proxy voting guidelines for the UK have been published by Glass Lewis.
The guidelines include the following amendments:
Diversity of Ethnicity and National Origin at Board Level - Generally from 2022 onwards Glass Lewis will recommend against the re-election of the chair of the nomination committee at any FTSE 100 board that has failed to appoint at least one director from a minority ethnic group and has failed to provide clear and compelling disclosure for why it has been unable to do so.
The Role of a Committee Chair - In the event of Glass Lewis recommending against the appointment of a committee chair but the chair is not up for re-election due to the company having a staggered board, it may, depending on the circumstances, recommend that shareholders instead vote against the re-election of any long-serving committee members.
Remuneration Committee Performance and Accountability - The guidelines have been updated to reflect that Glass Lewis may recommend that shareholders vote against the re-election of the remuneration committee chair where there are substantial concerns with the remuneration policy presented for shareholder approval and/or the pay practices outlined in the remuneration report. In staggered boards where the committee chair is not up for re-election, Glass Lewis may instead recommend that shareholders oppose the re-election of a long-serving committee member.
Environmental and Social Risk Oversight - Glass Lewis will generally recommend that shareholders vote against the re-election of the governance committee chair (or equivalent) of FTSE 100 companies that fail to provide explicit disclosure concerning the board’s role in overseeing material environmental and social issues.
Additionally, the guidelines contain clarification from the 2021 guidelines in several areas including its approach to ESG; how shareholder proposals are analysed and that the assessment of board-level gender diversity is based on the self-identification of directors.
Read more: 2022 Policy Guidelines
Annual Review of Corporate Reporting
The Financial Reporting Council (FRC) has released its annual review of corporate reporting 2020/2021.
The report outlines the 10 areas where improvements to reporting are required following a review of the accounts of 246 companies. Areas where improvements are noted as being required include:
- Judgements and Estimates - Critical judgement disclosures should be entity-specific and not just repeat the accounting standards. They should explain the specific accounting judgements made and their effects on the financial statements.
- Alternative Performance Measures - Companies should not give undue prominence to APMs; for example, by only giving meaningful commentary on a non-GAAP basis. The basis for classifying amounts as adjusting, ‘non-underlying’ or ‘non-core’ should be explained; APMs should be reconciled to the most directly reconcilable line item presented in the financial statements; and adjustments made in calculating APMs should include gains as well as losses, where relevant.
- The Strategic Report - Companies should highlight and explain linkages between information presented within the strategic report and the annual report and accounts more broadly.
- Compliance with the Companies Act 2006 Relating to Distributions - Companies are reminded of the specific statutory requirements around distributions, including the requirement to file accounts to support interim distributions in excess of retained earnings at the previous year-end.
For 2021/2022 the FRC expects there to be:
- A clear explanation of the significant judgements made by management, including those used in their assessment of going concern, with enough detail to understand the specific judgements made and their financial reporting effects
- Information in the financial statements to be consistent with that reported in the rest of the annual report and accounts and for material information not be obscured by immaterial items
- The strategic report should address the positive and negative aspects of the company's development, performance, position and prospects openly, and without bias
- There should be compliance with the statutory requirements around distributions, including the requirement to file accounts to support interim distributions in excess of retained earnings at the previous year-end
Read more: Annual Review of Corporate Reporting
In addition, the FRC has also published a year-end bulletin of key corporate reporting matters for 2021/2022. Among the areas of focus are climate-related risks and new disclosures including how companies report against the new Taskforce for Climate-related Financial Disclosures recommendations; and judgement and uncertainty in the face of the continuing economic and social impact of COVID-19.
Read more: Key matters for 2021/22 reports and accounts
Structured Electronic Format for Annual Financial Reports
The Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC) have issued a joint letter to the Chief Executives of listed companies concerning the reporting format obligation in DTR 4.1.14R.
The letter serves as a reminder that for those issuers who are subject to the requirements of DTR 4.1.14R that mandatory filing in a structured XHTML web browser format comes into force for financial years starting on or after 1 January 2021, for filing from 1 January 2022. The letter details the expectations on quality with particular emphasis being placed on issuers being aware of the issues raised in the FRC Lab report which reviewed the filings of those issues who had voluntarily filed in the XHTML format.
Companies are also reminded of the expectation that they need to devote the same degree of care and attention of the annual report produced in XHTML format as for PDF and printed formats.
Read more: Structured reporting for issuers
Read more: Structured reporting: an early implementation study
BEIS, HMRC and HM Treasury published a joint consultation paper seeking views on a proposal to introduce a corporate re-domiciliation regime which would enable foreign companies to re-register as companies incorporated in the United Kingdom.
The proposal is being considered to increase the attractiveness and availability of the UK as a destination to locate a business and in which to invest. A re-domiciliation regime will also modernise the UK’s legal framework, bringing it in line with around 50 countries and jurisdictions which also have re-domiciliation regimes including Canada, New Zealand, Singapore (on an inward-only basis), several US states (Delaware, Florida, Wyoming and others), Cyprus, Malta, Belgium, Luxembourg, and (solely for investment funds) Ireland.
The paper does not make any proposals for internal re-domiciliation within the UK e.g. English and Welsh to Scottish registered and vice versa. However, the consultation does state that the Government “welcomes views on any bearing the situation may have on decisions to re-domicile” The consultation closes on 7 January 2022.
Amongst other matters views are sought on:
- The advantages of and the level of demand for such a regime
- The appropriate eligibility criteria
- Insolvency matters including appropriate protections for creditors in the event of the company becoming insolvent shortly after it re-domiciles
- Whether there should be an outward re-domiciliation regime to enable UK companies to register abroad and the criteria that would need to be met to permit this to happen.
Read more: Corporate re-domiciliation
National Security And Investment Act 2021
BEIS has issued a notice explaining how the Secretary of State will exercise the power to call in acquisitions in accordance with section 3 of the National Security and Investment Act 2021.
Each qualifying acquisition will be assessed on a case-by-case basis, taking account of all relevant considerations and with regard to:
- target risk (whether the target of the qualifying acquisition is being used, or could be used, in a way that raises a risk to national security)
- acquirer risk (the acquirer has characteristics that suggest there is, or may be, a risk to national security from the acquirer having control of the target) and
- control risk (the amount of control that has been, or will be, acquired through the qualifying acquisition, a higher level of control may increase the level of national security risk).
While it is expected that, when calling in an acquisition, all three risks will be present, the Secretary of State does not rule out calling in an acquisition based on fewer risk factors. The call-in power can only be used for dealing with risks to national security.
Read more: National Security and Investment Act 2021: Statement for the purposes of section 3
Financial Services Act 2021
On 21 October, the Financial Services Act 2021 (Commencement No 3) Regulations 2021 were published. The regulations were effective from 1 November 2021 with the provision of section 31 of the Financial Services Act 2021 being implemented.
The maximum sentence for conviction on indictment for insider dealing offences will be increased from seven to ten years. Companies may wish to review share dealing codes which specify the maximum prison term and update this documentation.
Read more: Financial Services Act 2021
Payment Practices and Performance
BEIS has issued an invitation to contribute views and evidence to the statutory review of the Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017.
The regulations have been in force since 6 April 2017 and there is a requirement for these to be reviewed by the Secretary of State on a periodic basis. The next review needs to take place and a report published by 6 April 2022. Any comments need to be received by 4 February 2022.
The review seeks comments on whether the regulations have met their objectives, if there have been any unintended effects and if the regulations should remain in effect.
Read more: The Reporting on Payment Practices and Performance Regulations
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