Ashurst Governance & Compliance Update - Issue 39
01 August 2023
01 August 2023
The Department for Business & Trade has published the draft Companies (Strategic Report and Directors' Report) (Amendment) Regulations 2023, together with an explanatory memorandum. The regulations form part of the government's reform agenda to 'Restore trust in audit and corporate governance' (for an overview, see AGC update, Issue 20) and amend the Companies Act 2006 to introduce new reporting requirements for 'size-based' public interest entities or 'PIEs', being public or private UK-incorporated companies with 750 or more employees and an annual turnover of £750 million or more.
In-scope companies will be required to publish the following new disclosures:
1. An annual resilience statement, to be included in the company's strategic report, in which the company must explain the steps it is taking to build or maintain its business resilience over the short, medium and long term, including by:
2. An annual distributable profits figure, to be included as a note to the accounts, and an annual distribution policy statement, to be included in the directors’ report, requiring the following information:
3. An annual material fraud statement, to be included in the directors’ report, providing a summary by the directors of:
4. A triennial audit and assurance policy statement, to be included in the directors’ report, and to include:
The draft regulations were laid in Parliament on 19 July 2023 and will be debated in Parliament in due course. The regulations are expected to apply to financial periods of in-scope PIEs with securities admitted to trading on UK regulated markets beginning on or after 1 January 2025. The regulations will apply to all other in-scope PIEs, such as private companies and those with securities admitted to trading on AIM, a year later.
The DBT has published a helpful overview of the regulations which provides an overview of their scope and application, including in relation to groups of companies, and which describes the purpose underpinning each of the requirements. The FRC plans to consult separately on detailed non-statutory guidance about good practice in complying with the reporting statements; this is expected to be published by the end of 2023 or in early 2024.
The government has published its response to the consultation it launched in 2018 which focused on whether and, if so, how companies should report information on ethnicity pay, potentially on the same basis as is currently required in relation to gender pay.
Its conclusion is that, while ethnicity pay gap reporting can be a valuable tool to assist employers, it may not always be the most appropriate mechanism for every type of employer. Therefore, as set out in the 'Inclusive Britain' report, which was published in March 2022, the government will not be legislating to make ethnicity pay reporting mandatory at this stage. Instead, it has produced guidance to support employers who wish to report voluntarily. This was published in April 2023 and covered in AGC update, Issue 34.
The FRC has published its annual inspection and supervision results of the largest audit firms (BDO, Deloitte, EY, Grant Thornton, KPMG, Mazars and PwC). Overall, 75 per cent. of audits inspected were good or required limited improvement (compared to 71 per cent. in 2021 and 67 per cent. in 2020).
The number of audits considered good or requiring limited improvement has improved on the previous two years. The FRC believes that a combination of the FRC’s increasingly assertive supervision approach, as well as investment from the firms in their systems, people and capabilities to improve audit quality, is starting to have a positive impact. However, the picture is mixed, with some 'challenger' firms receiving particularly pointed criticism as to the standard of their work.
Individual firm reviews and a link to a podcast discussing the results, can be found here.
The FCA has published a webpage setting out the requirement for issuers to provide a Russia and Belarus sanctions confirmation when making a vetting, guidance or listing application request. The confirmation will be required in the context of:
The webpage also includes the form of confirmation. The confirmation must be provided by the issuer, sponsor or advisor and provided for every transaction. No variations to the specified wording will be accepted. The confirmation must be provided as a signed and dated letter on headed paper, or an email which clearly identifies the person providing the confirmation, their role, and the date.
Following the recent publication of the ISSB Standards on climate related disclosures, the IFRS Foundation has published a comparison of the requirements in IFRS S2 Climate-related Disclosure and the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations.
The requirements in IFRS S2 are consistent with the four core recommendations and eleven recommended disclosures published by the TCFD. As a result, companies that apply the ISSB Standards will meet the TCFD recommendations and do not need to apply the TCFD recommendations in addition to the ISSB Standards.
There are additional requirements in IFRS S2. These include the requirements for companies to disclose industry-based metrics, to disclose information about their planned use of carbon credits to achieve their net emissions targets and to disclose additional information about their financed emissions.
The Financial Stability Board has asked the IFRS Foundation to take over responsibility for the monitoring of progress on companies’ climate-related disclosures from the TCFD.
The International Organization of Securities Commissions (IOSCO) has announced its endorsement of the ISSB Standards.
The announcement follows the recent release of the ISSB’s first two Standards, IFRS S1 and IFRS S2 (see AGC Update, Issue 38) and sends a strong signal to jurisdictions around the world that the ISSB Standards are fit for purpose for capital market use, enable pricing of sustainability-related risks and opportunities, and facilitate enhanced data collection and analysis.
IOSCO is now calling on its 130 member jurisdictions—capital markets authorities that regulate more than 95 per cent. of the world’s securities markets—to consider how they can incorporate the ISSB Standards into their respective regulatory frameworks to deliver consistency and comparability of sustainability-related disclosures worldwide.
The IFRS Foundation has released a document outlining how the ISSB and the IFRS (working closely with IOSCO) plan to support implementation of the standards, and the steps already taken.
Separately, the FRC has issued a call for evidence to inform the proposed endorsement of the ISSB Sustainability Disclosure Standards in the UK. The due date for submissions is 11 October 2023.
The FRC has published a thematic review, assessing the quality and maturity of climate-related metrics and targets disclosures.
The review considers the TCFD metrics and targets disclosures of twenty UK premium and standard listed companies operating in four sectors (materials and buildings, energy, banks, and asset managers) covered by TCFD sector-specific supplemental guidance included in the TCFD Implementing the Recommendations of the Task Force on Climate-Related Financial Disclosures document (the ‘TCFD Annex’). Four of the companies reported against the TCFD recommendations for the first time, with the others providing a second year of mandated TCFD reporting.
In undertaking the review, the FRC considered four overarching questions:
The review sets out the FRC's cross-sector and sector-specific observations and its expectations of companies’ future reporting. Better practice disclosures are provided throughout the review.
The main areas where the FRC believes there is room for improvement include:
The review also found that explanations of how climate targets affect financial statements still need improvement. Boilerplate language on climate being 'considered' provides little insight on impacts.
The FRC Lab has published a report: 'ESG Data Distribution and Consumption' in which it examines how investors obtain and use ESG data on companies, and highlights what actions companies can take to facilitate this.
The report concludes that there is an ecosystem which is heavily dependent on third parties for the production of comparable ESG data, and while investors use companies' annual reports for qualitative context, most ESG metrics and data come from third-party providers who compile, standardise and derive data from company reporting. Investors occasionally use direct company data to check third-party accuracy.
The report contains a list of actions to facilitate how investors and data providers consume ESG data, including:
The report also includes a set of questions for boards to ask to understand more about the company's major shareholders and their ESG data requirements.
The Digitisation Taskforce has published an interim report which provides recommendations for government and seeks feedback in relation to improving the UK's intermediated system of share ownership.
The aim of the Taskforce, which is chaired by Sir Douglas Flint, is to drive forward the full digitisation of the UK framework by eliminating the use of paper share certificates.
The potential recommendations in the interim report are:
In relation to the potential recommendations the interim report raises a series of questions to which the Taskforce is seeking responses.
The Taskforce welcomes feedback on the report and on the questions posed by 25 September 2023.
HM Treasury has published a consultation on the first financial market infrastructures (FMI) Sandbox, the 'Digital Securities Sandbox' or DSS, which will enable digital services to be tested and ultimately adopted across financial markets.
The DSS would enable firms to set up and operate financial market infrastructures using innovative digital asset technology, performing the activities of a central securities depository (specifically notary, settlement and maintenance), and operating a trading venue, under a legislative and regulatory framework that has been temporarily modified to accommodate digital asset technology.
These activities will be performed in relation to existing security classes (which could either be digitally native issuances or digital representations of existing securities). Limits will be put in place for participating entities, which can be increased as progress is made. These limits will reflect the ability of a participating entity to meet requirements and manage risks.
These will be real-world market activities and assets. The intention is that any digital securities issued, traded, settled and maintained via entities in the DSS will be able to interact with wider financial market activities (e.g. for collateral posting or repos), where this can be done in compliance with existing legislative and regulatory frameworks.
Authors: Will Chalk, Partner; Rob Hanley, Partner; Marianna Kennedy, Senior Associate