Governance & Compliance Update - Issue 145

Included in this issue of our Governance & Compliance Update: FRC’s Financial Reporting Lab publishes report on climate change disclosures; BEIS publishes report on stakeholder perceptions of the non-financial reporting regime; FCA publishes proposals for action on climate change and green finance; and more...

Narrative Financial Reporting

FRC’s Financial Reporting Lab publishes report on climate change disclosures

The Financial Reporting Council’s (FRC) Financial Reporting Lab (Lab) has published practical guidance on how companies can improve their reporting of climate change information in order to meet investors’ expectations and build towards the Government's stated desire that all listed companies and large asset owners will disclose in line with the Task Force on Climate-related Financial Disclosures' (TCFD) recommendations by 2022.

The Lab believes that investors consider the issues raised to be material to a wide range of businesses. The report states that, while there is inherent uncertainty in this area, those companies and investors that are addressing and considering climate-related issues recognise the benefit that comes from a robust consideration of the future challenges facing each company, and a connected benefit of being more able to respond and reposition as necessary. Reporting on climate-related matters "requires companies to ask themselves challenging questions, make reasonable assumptions on the information available, and develop their strategic approach from there". Reporting then flows from this assessment.

Investors outlined that they would like companies to articulate:

how boards consider and assess the topic of climate change;
whether, and how, a business model may be affected by climate change, whether it remains sustainable, and how a company may respond to the challenge posed by climate change;
what the opportunities and risks are, including the prioritisation of risks and their likelihood and impact;
what changes a company might need to make to its strategy in order to capitalise on a changing climate and related opportunities;
what scenarios might affect a company’s sustainability and viability, and how; and
how impact is measured and how a company measures the climate-related challenges and the success of its strategy through strategically aligned, reliable, transparent metrics and financially-relevant information.

The Lab's report is divided into five sections the coverage of which includes:

in Section 1, investor and company views on the four TCFD core elements: (1) governance; (2) business models and strategy; (3) risk management; and (4) metrics and targets. Each includes a set of questions companies should ask themselves to help develop their reporting. Section 1 also outlines areas of developing reporting practice and links to examples, as well as providing tips on how to bring this information together in a coordinated way;
in Section 2, the questions for companies and disclosure recommendations across the TCFD core elements;
in Section 3, examples of developing reporting practice which seek to illustrate how companies are trying to meet the reporting challenge. Examples are organised around the same four TCFD core elements; and
in Section 5, an overview of the main regulatory and market initiatives relevant to companies’ disclosure on climate change, and some broader input on investor requirements and activity.

The Lab recognises that many of the reporting recommendations could equally apply to other sustainability-related topics, including the workforce - which will be the subject of a separate Lab report in due course.

BEIS publishes report on stakeholder perceptions of the non-financial reporting regime

The Department for Business, Energy and Industrial Strategy (BEIS) has published a report presenting research it commissioned from PwC which examines stakeholder perceptions of the non-financial reporting regime in the UK and, in particular:

The report concludes that, in general, stakeholders were very positive about the strength of the corporate governance regime in the UK and all stakeholders were in favour of non-financial reporting, as were many businesses that took part. There was a general consensus amongst stakeholders that the importance of non-financial reporting would only increase as influential investors push for greater transparency, the focus on sustainable development goals increases and the recommendations of the TCFD become embedded.

FCA publishes proposals for action on climate change and green finance

The Financial Conduct Authority (FCA) has published a Feedback Statement (FS19/6) summarising the responses to its Discussion Paper (DP18/8) which sought views on potential FCA action on climate change and green finance.

Proposals include:

consulting in early 2020 on new disclosure rules for certain listed issuers aligned with the TCFD recommendations, as well as clarifying existing disclosure obligations relating to climate change risks. This aligns with the Government’s expectation in its Green Finance Strategy that all listed issuers disclose in line with the TCFD’s recommendations by 2022;
publishing a response to its joint Discussion Paper (DP19/1) with the FRC on stewardship which will set out actions to help address some of the most significant barriers to effective stewardship – covered below; and
challenging firms where the FCA see potential "greenwashing" – where financial products are marketed as sustainable but which are not, in fact, materially different to products that do not have such a label – and issuing guidance and taking action to prevent consumers being misled.

The FCA will provide an update on its work in this area as part of the report it will submit to the Department for Environment, Food and Rural Affairs in 2021.

Future of Corporate Reporting Survey

As part of the FRC's examination of the Future of Corporate Reporting, it is seeking stakeholders’ views to help shape and improve information for all users of corporate reports based on answering the basic question of: ‘what information do users need’?

The short survey asks about personal experience and expectations when seeking and using company information. It closes on 15 November 2019.

Respondents' views will inform the FRC’s project which seeks to make recommendations for improvements to current regulation and practice and develop “blue sky” thinking to promote greater “brevity, comprehensibility and usefulness in corporate reporting” moving forward.

Summary results will be published alongside the Future of Corporate Reporting thought leadership paper in 2020.

Equity capital markets

ESMA consultation on MAR

The European Securities and Markets Authority (ESMA) has published a consultation on the EU Market Abuse Regulation (MAR) in which it calls for views on various issues including:

Inside information – How easy (or otherwise) is it for issuers to determine whether inside information exists? Is the definition of inside information "sufficient for combatting market abuse"?
Delaying disclosure – Do the conditions for delaying disclosure function properly? Should issuers be required to have in place systems and controls for identifying, handling and disclosing inside information?
Insider lists – Should insider lists be limited to those who have accessed inside information as opposed to those who have access to it? Should the insider list regime be expanded to include any person with access to inside information, irrespective of whether they act on behalf or on account of the issuer – such as auditors? What value is the list of permanent insiders?
PDMR transactions – Should the closed period regime prohibiting transactions be extended to issuers and the closely associated persons of PDMR? Should further exemptions to the closed period prohibition on dealing be introduced?
Market soundings / buy-back programmes – Questions are raised here as regards the scope and potential simplification of both regimes.

Feedback is requested by 29 November 2019. Whether any resultant changes to MAR are of application in the UK depend on Brexit and the nature of any such departure from the EU.

Stewardship

FRC publishes revised UK Stewardship Code

The FRC has published the revised version of the UK Stewardship Code (Code) following the consultation it launched in January 2019. The FRC believes that the new Code "substantially raises expectations for how money is invested on behalf of UK savers and pensioners".

The revised Code focuses on the responsible investment of money with a new emphasis on creating long-term value and on considering beneficiary and client needs. It directly addresses the issues raised by Sir John Kingman’s independent review of the FRC in respect of the previous Code. It comprises a set of 12 "apply and explain" principles for asset managers and asset owners, and a separate set of six "apply and explain" principles for service providers. Each principle is supported by reporting expectations which signpost the information that organisations should include in their report, and which underpin the assessment of reporting quality.

Key changes in the new Code include:

an extended focus that includes asset owners, such as pension funds and insurance companies, and service providers as well as asset managers. This is intended to help align the approach of the whole investment community in the interest of end-investors and beneficiaries;
a requirement to report annually on stewardship activity and its outcomes. Signatories’ reports will show what has actually been done in the previous year, and what the outcome was, including their engagement with the assets they invest in, their voting records and how they have protected and enhanced the value of their investments. This greater transparency is intended to allow clients to see how their interests are being served. Reports must be submitted to the FRC for approval and will need to meet FRC expectations for an organisation to become a signatory to the 2020 Code;
an expectation that signatories will take environmental, social and governance (ESG) factors, including climate change, into account and to ensure their investment decisions are aligned with the needs of their clients;
an expectation that signatories will explain how they have exercised stewardship across asset classes beyond listed equity, such as fixed income, private equity and infrastructure, and in investments outside the UK; and
a requirement for signatories to explain their organisation’s purpose, investment beliefs, strategy and culture and how these enable them to practice stewardship. They are also expected to show how they are demonstrating this commitment through appropriate governance, resourcing and staff incentives.

The new Code takes effect on 1 January 2020. Transitional arrangements from the 2012 to the 2020 Code can be found in Part 3 of the FRC's Feedback Statement.

ICGN launches consultation on Global Stewardship Principles

The International Corporate Governance Network (ICGN) has launched a consultation on proposed revisions to its Global Stewardship Principles.

While the ICGN believes that its current principles remain fit for purpose, the review is intended to identify possible changes or improvements to keep them "fresh and relevant". Key changes proposed in the consultation include:

greater emphasis on fiduciary duty, culture and values by institutional investors;
more focus on systemic risks relevant to institutional investors;
capital allocation as a topic for engagement for both creditors and shareholders;
protecting voting rights against dual class shares and other forms of differential ownership;
a focus on stewardship outcomes versus inputs when reporting; and
use of ESG factors in investment decision making, as well as stewardship.

ICGN members are requested to respond to the consultation by 22 November 2019 with a view to the adoption of the revised principles at the ICGN AGM in June 2020.

FCA announces next steps on stewardship regulatory framework

The FCA has published a Feedback Statement responding to its Discussion Paper on Building a Regulatory Framework for Stewardship (DP19/1) published jointly with the FRC. The feedback reveals various remaining barriers to effective stewardship across the institutional investment community, to which the FCA proposes to respond with various proposals including:

taking action to focus on the arrangements between asset owners, asset managers and service providers and how these support stewardship objectives;
as mentioned above, consulting in early 2020 on proposals to introduce new 'comply or explain' climate change disclosure rules for certain listed issuers aligned with the TCFD's recommendations;
continuing to work with industry to provide clarity in relation to MAR and competition law;
engaging with the FRC as it implements the UK Stewardship Code 2020; and
monitoring the outcomes of the new regulatory regime for proxy advisors.