Welcome to our monthly bulletin of what’s happening within the regulatory environment that impacts the share registration and employee share plans space.
CEO - EQ Boardroom
Climate change was one of the top agenda items at the recent G7 summit.
Hosted in Cornwall, the region boasts some of the UK's greenest credentials and is central to the UK's green technology sector.
Naturally, this month's bulletin follows a similar theme. The Investment Association asks for more support to improve reporting in this area and we see higher standards from the FTSE4Good indices on their climate standards.
As always, if you have any questions on the content of this month's bulletin, please contact your Client Relationship Lead.
Did you miss the last EQuivalence Forum? You can catch up here.
Managing Director, Prism Cosec
An insight from Prism Cosec
Despite the COVID pandemic, the urgency of climate change is continuing to drive the focus of investors, activists and others. In the last month or so, we have seen tougher climate standards for companies in the FTSE4Good index, and board changes brought about by investors to support carbon reduction strategies. The Investment Association also continues to be active in pressing for better, standardised reporting by companies on climate change and the GC100 has been monitoring the new climate-related requirements for premium listed companies. Companies and Boards can be certain that this is one topic that will only increase in importance for investors and needs to be addressed sooner rather than later.
The Investment Association demands action from the G7 on climate reporting
The Investment Association (IA) has issued a letter to ambassadors and High Commissioners of the countries taking part in the G7 summit asking for a commitment from them to help improve the reporting by companies about the climate-related risks they face. The IA is seeking mandatory climate-related risk reporting against a standardised set of principles. The specific requests made by the IA include:
Support for the IFRS’ Sustainability Standards Board to work at pace to develop sustainability reporting standards and increased cooperation between national regulators to endorse and implement these standards.
For national regulators to commit to implementing mandatory economy-wide reporting on international Task Force on Climate-related Financial Disclosures (TCFD).
International common standards to be agreed on green gilts by governments and national regulators.
Governments to set out at a high-level, sector-specific pathways to meet the Paris Agreement goals and prioritise providing further detail to reduce the risk of stranded assets.
TCFD consult on new guidance for climate-related metrics and targets
The Task Force on Climate-Related Financial Disclosures (TCFD) has published a consultation on its proposed Guidance on Climate-related Metrics, Targets and Transition Plans. The new guidance will provide information for companies in establishing metrics, targets and transition plans for their climate-related risks and opportunities. The consultation closes on 7 July 2021, and the guidance will be finalised in autumn 2021.
The GC100 has published the results of a poll to find out how companies are responding to new requirements for premium listed companies to state in the annual report whether they have reported in line with the recommendations and disclosures of the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD). A total of 27 GC100 members responded to the poll.
Key results from the poll include:
18 companies indicated that they have already included detailed reporting in line with all or part of the TCFD recommendations.
19 companies are expected to include a statement of full TCFD compliance in the 2021 annual report and seven of partial compliance.
73% of companies said the biggest challenge in implementing the TCFD recommendations was overlapping guidance and frameworks. Other challenges included incorporating processes for identifying climate risks into existing processes, data gathering, time pressures, selecting scenarios to use and applying scenario analysis.
Anticipated costs of implementation ranged from £100,000 to £500,000. Most indicated the main cost was from hiring external consultants for advisory support and obtaining assurance.
Most companies anticipated a time frame of one to two years to achieve full compliance. The longest estimate was five years.
16 companies indicated that they would seek independent assurance of their TCFD disclosures carried out by either environmental consultants, sustainability rating providers, quality assurance consultants or one of the Big 4 accounting firms.
Companies may be deleted from FTSE4Good indices for failure to meet climate standards
The FTSE Russell Group has issued a press release stating that 208 companies of FTSE4Good are at risk of being deleted from the index after failing to meet new climate performance standards. FTSE Russell used the Transition Pathway Initiative (TPI) Climate Change Scores to make the assessments. The companies involved have until June 2022 to meet the required standard or be deleted from the FTSE4Good Index Series.
The FTSE Russell press release is available from here.
Hedge fund forces ExxonMobil to appoint new directors in favour of carbon reduction
A small activist hedge fund, Engine No. 1, has forced the board of ExxonMobil to appoint at least three new directors who strongly support the introduction of an urgent carbon reduction strategy for the company. The fund was able to do this by engaging BlackRock, which other large investors then followed. BlackRock has made a public commitment to requiring all companies it invests in to become net carbon zero by 2050.
FRC’s review of workforce engagement reporting and practices
The Financial Reporting Council (FRC) has published a study on the reporting and practices of companies in connection with the workforce engagement requirements of the UK Corporate Governance Code (the Code). The review is based on an analysis of annual reports, a survey of FTSE 350 firms and interviews with directors, executives and workforce representatives. Key highlights of the review are:
In the vast majority of cases, decisions on the form of engagement were made without workforce consultation.
Of the three options in the Code - a worker director, designated non-executive director or advisory panel - 68% of companies adopted one or more of these methods due to the Code.
40% of those surveyed appointed a designated NED
12% established an advisory panel.
16% combined an advisory panel with a designated NED.
Only one company appointed a worker director following the new requirement. In addition, there are already four FTSE 350 companies with a worker director.
32% of companies chose an alternative arrangement or claimed existing arrangements satisfied Code requirements such as staff surveys and site visits.
For most companies, there has been an evolution of existing practices rather than a revolution in approach.
The key recommendations put forward in the review are:
The breadth of coverage – Ensure the employee voice reflects the geography and demography of the workforce.
The depth of coverage – integrate different engagement channels.
Provide for regular and structured input from the workforce.
Workforce representatives should be chosen with some input from the workforce.
The focus should be on the substance of workforce engagement, not the process.
Agenda setting for engagement is best when there is a balance between management interest topics and workforce interest topics.
An effective feedback loop is required based on the informed employee voice.
The QCA report and guidance onboard performance reviews for smaller companies
The Quoted Companies Alliance (QCA) has published the QCA Board Performance Review Report produced in collaboration with Downing LLP and Henley Business School. The report looks at the approach of small and mid-sized companies to board performance reviews. The analysis is based on 30 interviews with companies and investors and 100 survey results. A series of 17 observations are made, the highlights of which include:
Of the 100 companies surveyed, 22 had no formal board performance review (termed 'inactive boards' in the review).
The research acknowledged that the informal review had value and could work effectively but was not generally appropriate for more established and larger companies.
Of the 78 companies that conducted formal board performance reviews, 56 approached this proactively with regular formal reviews, objectives set from the start, follow up from previous evaluations, effective application of recommendations from the review and change to objectives in response to results of the review.
Proactive boards tended to be larger companies with more than 250 employees.
Reasons given for not carrying out a formal review were budget and a perception of low value of board reviews.
The Company Secretary is most likely to drive the board performance review process (53%), followed by the Chair (44%).
Customised structured questionnaires (72%) and one-to-one discussions/interview (67%) are the most common methods used to carry out the review. Only 13% sought feedback from internal stakeholders and 10% from external stakeholders.
Both proactive and reactive boards highlight benefits from board performance reviews as improved board performance as a whole improved individual performance, and enhanced governance.
56% of surveyed companies summarise the key points/themes from the review in their annual report. 39% do not give any information from the review.
The overall conclusion of the QCA’s report was that there was still a lot of room for improvement in board performance review practice in small and mid-sized quoted companies.
Alongside the review report, the QCA has published a QCA Board Performance Review Guide with practical information for companies on approaching the board performance review, ten corporate governance principles for companies to follow and guidance on how to apply these principles.
The Board Performance Review Guide is available to members for free or to non-members for £85.
The Chartered Governance Institute (CGI) has published the second of three reports looking at how exclusion occurs in the boardroom. The first part, published in May, covered the board agenda. The second report looks at board dynamics, how decisions are made and the discussions that are or are not taking place in the boardroom. The survey was completed by 310 Company Secretaries, directors and executives. Key highlights from the report include:
Before COVID-19, many boards failed to engage in uncomfortable conversations. 75% acknowledged that admitting mistakes was not a regular occurrence, with 43% indicating that this rarely happened. 71% reported that challenging core assumptions was not a common occurrence.
Boards that failed to invest in team alignment and can be considered 'bubble bound' were much more likely to show suppressive dynamics with poor chairing and dominating behaviour. Few were confident that their board set-up was ideal for effective governance.
Boards that invested in team alignment had a more synergistic approach to decision-making, emphasising learning and valuing difference. The majority were confident that their boards were ideal for effective governance.
Since COVID-19, some of the 'bubble bound' boards changed their behaviours and were more likely to engage in uncomfortable conversations.
The results indicated that team alignment helped boards and executive committees to get out of their comfort zones and created better dynamics for effective decision making.
The third CGI report focuses on board composition and will be available in July.
The Department for Business, Energy and Industrial Strategy (BEIS) has published a research paper on CEO performance targets and pay incentives from 2013 to 2019. The study has three aims:
To explore the prevalence of different performance targets in UK executive pay contracts, with a view to better understanding the use of different target types and whether they are calibrated effectively to incentivise target achievement.
To examine the evidence for whether CEOs influence firm investment decisions to improve performance against specific targets in their pay contracts.
To examine the evidence for whether there is a systematic relationship between the presence and size of specific performance targets and firm investment.
The main results from the research found that:
There is good evidence to suggest that CEO performance targets do influence company performance in a manner consistent with increasing CEO pay out.
It is less clear that CEOs influence company performance (and therefore their pay) by changing investment. There is evidence of such investment decisions in certain firms and less clear evidence across the FTSE All-Share group.
The evidence does not suggest a systematic problem with executive pay causing underinvestment.
The paper concludes that there is scope for further research to ascertain whether the overall value of CEO performance targets and how they may lead to CEOs acting in self-interest (whilst also having some positive consequences).
HM Treasury consultation on the power to stop listings on national security grounds
HM Treasury is carrying out a consultation on proposals to give the Government power to block listings on UK public markets on national security grounds. The power scope will be limited to all initial equity listings but would not apply to secondary trading. It is proposed that a limited amount of additional information will be required from companies at the time of listing, including details about the company, business overview, management, major shareholders and reason for the offer.
The consultation closes on 27 August 2021 and is available from here.
Stamp Presses Decommissioned by HMRC
HM Revenue and Customs (“Commissioners”) will discontinue the use of all physical stamps in respect of stamp duty from 19 July 2021, which will impact all transfers and instruments that stamp duty arises in connection with, or is payable on.
Instruments transferring stock and marketable securities.
Instruments transferring interests in partnerships that hold stock or marketable securities.
Instruments transferring land, where the instrument was executed before 1 December 2003 and has not previously been duly stamped.
The transfer of bearer instruments.
The transfer of land, where the contract to transfer the land was entered into on or before 10 July 2003.
The Commissioners also gave notice, under the same provision, for a new electronic procedure to replace physical stamping.
You can find further detail on this procedure here.