Legal development

Ashurst Governance and Compliance Update - Issue 6

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    ESG Developments

    1. Climate change reporting: TCFD publishes 2021 status report

    2. The Chancery Lane Project publishes a Net Zero Toolkit

    Narrative and financial reporting

    3. European Single Electronic Format "ESEF" Reporting

    4. FRC publishes thematic review into the use of Alternative Performance Measures

    5. FRC publishes review on viability and going concern disclosures


    6. LGIM publishes its UK Principles of Executive Pay 2021

     Declaring dividends in 2022

    7. LSE publishes 2022 Dividend Procedures Timetable

     Reform: Dematerialisation and electronic signatures

    8. Dematerialisation and use of electronic signatures



    1. Climate change reporting: TCFD publishes 2021 status report

    The Task Force on Climate-related Financial Disclosures (TCFD) has published its 2021 Status Report in which it sets out how disclosures of climate-related financial information aligned with the TCFD recommendations have developed since its 2020 review. It is of particular interest this year given that many premium-listed companies will be producing their first reports in accordance with the TCFD's recommended disclosures in 2022. By way of reminder, the FCA is currently considering extending the reporting obligation to issuers of certain standard-listed equity securities, asset managers and life insurers and the government is also considering feedback on its March 2021 consultation to extend the reporting obligation still further to certain AIM-quoted and larger private companies as well as limited liability partnerships.

    The report finds that the disclosure of TCFD-aligned climate-related financial information has accelerated over the last year, growing by nine percent in 2020 (2019: 4 per cent), with over 50 per cent of the companies reviewed disclosing their climate-related risks and opportunities. More than 2,600 organisations have expressed their support for the TCFD recommendations, an increase of over a third since the 2020 status report. Supporters include 1,069 financial institutions, responsible for assets worth $194 trillion, with a combined market capitalization of over $25 trillion — a 99 per cent increase since last year.

    More specifically, the status report finds that:

    • Disclosure increased more between 2019 and 2020 than in any previous year assessed. However, significant progress is still needed as only 50 per cent of companies reviewed disclosed in alignment with at least three of the 11 recommended disclosures.
    • Companies remain more likely to disclose information on their climate-related risks and opportunities (Disclosure reference: Strategy "a" in the TCFD recommendations), than on any other recommended disclosure, with over half of the companies reviewed including such information in their 2020 reports.
    • Disclosure of the resilience of companies’ strategies under different climate-related scenarios (Disclosure reference: Strategy "c"), although still the least reported recommended disclosure, encouragingly increased from 5 per cent of companies in 2018 to 13 per cent in 2020.

    The Task Force has also published:

    2. The Chancery Lane Project publishes a Net Zero Toolkit

    Ahead of the UN's November 2021 COP26 climate conference, The Chancery Lane Project (TCLP) has published a "Net Zero Toolkit" to help lawyers amend contracts to meet net zero goals. The Toolkit includes:

    • 100 free-to-use climate clauses, including 20 new clauses that are aligned with the Paris Agreement goals.
    • Net zero implementation tools to help lawyers understand the concept of net zero, define climate terms and identify key issues when including net zero commitments in contracts.
    • Other tools including a clause timeline and net zero transition map to help lawyers choose the right climate clauses for their agreements.

    The new clauses principally cover corporate governance, supply chain contracts, construction and infrastructure projects, finance and insurance contracts and are relevant to several practice areas, including corporate, commercial and employment.


    3. European Single Electronic Format "ESEF" Reporting

    By way of reminder, DTR 4.1.14 of the Financial Conduct Authority (FCA) Handbook implements the requirements of the European Single Electronic Format (ESEF) regime in the UK and requires issuers with transferable securities admitted to trading on UK regulated markets to produce their annual financial reports in a structured electronic format for financial years beginning on or after 1 January 2021. We covered various recent developments on the issue in Ashurst Governance and Compliance update, Issue 5.

    By way of further update, the FCA has updated its webpage: "Filing of Structured Annual Financial Reports", which includes an overview of the filing process for such reports and a link to the "ESS submission portal". It also encourages issuers to file reports in this format voluntarily ahead of being required to do so both to improve transparency and help companies themselves prepare for the advent of the mandatory regime.

    The webpage also sets out feedback which the FCA has received on the submission system and advance notification of modifications it intends to make to it. In addition, the FCA notes that it will be making changes to the mandatory reporting regime, including enabling the system to reject submissions which do not use a permitted taxonomy. FCA submission guides will be updated in due course to provide more information on these changes.

    On the same issue, the Financial Reporting Lab (FR Lab) has published a report: "Structured reporting: an early implementation study" which aims to support companies in their implementation of the requirements. In producing the report, the Lab looked at fifty early structured reports from across the UK and Europe. These reports were either voluntary filings or originated from EU countries where the requirements have already come into force.

    Key messages from the report include:

    • The majority of reports fell short of the quality that is expected for companies’ official filings. More than 70 per cent of the files contained tagging errors, more than half had issues which potentially limited their usability, and more than 25 per cent had design problems.
    • Although numerous issues were identified during the review, almost all of them could have been avoided with appropriate care and attention. The Lab believes that a focus on quality by companies is crucial for a successful roll-out of structured reporting.
    • The Lab identified practice tips across three broad areas: process, usability & appearance, and tagging – these are set out in detail in the report. Key tips for companies are also summarised, together with a list of questions for companies and boards to consider.
    • Companies should be aware that the issues identified are clearly visible to users and, therefore, may negatively affect a company's reputation and the willingness of stakeholders to use digital information.

    The Lab intends to produce further guidance if necessary and will be hosting a webinar on 7 December 2021 for companies and service providers. Further Lab resources on the topic and a registration page for the webinar can be found here

    4. FRC publishes thematic review into the use of APMs

    The Financial Reporting Council (FRC) has published a thematic review into the use of Alternative Performance Measures (APMs) by 20 UK-listed companies. The review assesses the quality of APM reporting in the UK, five years after the implementation of ESMA's Guidelines on Alternative Performance Measures and the introduction of IOSCO's Statement on Non-GAAP Financial Measures. It is the second such review the FRC has undertaken, following its 2017 thematic review.

    The review sets out the FRC's disclosure expectations as regards APMs, reflecting the ESMA Guidelines, which it expects main market companies to continue to apply notwithstanding the UK's withdrawal from the EU. The review also sets out additional expectations developed from other FRC publications and routine monitoring work. The FRC also notes that AIM-quoted companies and other entities that use APMs should apply the guidelines as they reflect best practice.

    Findings of the review

    The FRC found that, in general, companies provided good quality disclosures around their use of APMs, including as to their labelling and when defining them. However, around half of the companies surveyed gave APMs more prominence or ascribed more authority to them than GAAP measures in some areas of their reporting. The FRC expects companies to ensure that, as APMs are supplementary measures, they are not displayed more prominently than GAAP measures and that narrative reporting does not give them greater focus. It also expects to see Audit Committee reports explain the Committee’s oversight, monitoring and challenge in relation to the formulation and use of APMs.

    Key expectations for 2022

    In the 2022 reporting season, the FRC expects that companies should:

    • Ensure that APMs are not presented in ways that give them greater prominence than amounts derived from the financial statements.
    • Avoid comments that imply APMs have more authority than amounts stemming from the financial statements.
    • Provide specific, tailored explanations for the inclusion of individual APMs in their reports, as well as the basis for classifying amounts as adjusting items.
    • Explain terms such as "underlying profit" or "core operations" and the basis for identifying adjustments as "non-underlying" or "non-core".
    • Make sure that APMs are reconciled to the most directly reconcilable line items, subtotals or totals presented in the financial statements, and not to other APMs.
    • Disclose relevant information for any significant multi-year restructuring programmes that are classified as adjusting items.
    • Disclose the cash flow impact of material adjusting items and exceptional items.
    • Explain tax matters relating to APMs.

    5. FRC publishes review on viability and going concern disclosures

    The FRC has published a review of companies’ viability and going concern disclosures in which it identifies several areas where reporting could be improved. The review builds upon the information contained in the FRC's Guidance on Risk Management, Internal Control and Related Financial and Business Reporting and complements various recent FR Lab publications including: "Risk and Viability reporting", "Covid-19: Going concern, risk and viability" and "Reporting on risks, uncertainties, opportunities and scenarios", all of which have been covered in prior AGC updates. It is worth remembering that the perceived lack of insight delivered by going concern and, particularly, viability reporting has led to the government proposing the requirement for an enhanced "Resilience Statement" as part of its package of reforms to restore trust in audit and corporate governance.

    The FRC states that clear and comprehensive disclosures on these matters are particularly important given the backdrop of the Covid-19 pandemic which has caused greater uncertainty for some companies. In turn, it believes that such uncertainties which may impact viability or going concern should be clearly explained to stakeholders.

    In particular, the review found that:

    • The disclosure of inputs and assumptions used in forecast scenarios to support viability and going concern assessments often lacked sufficient qualitative and quantitative detail. Disclosures should be proportionate to the uncertainties to which a company is exposed, and to its financial position, therefore a company facing greater uncertainty and with less financial headroom should be providing more detail than one without such challenges.
    • In some cases, there was evidence to indicate that significant judgements may have been applied in determining whether a company was a going concern or whether this was subject to material uncertainty, but these judgements were not identified or explained. The FRC expects company specific significant judgement disclosures to be presented in cases where significant judgement has been exercised either in determining whether the company is a going concern or whether a material uncertainty in respect of going concern exists.
    • While all companies preparing a viability statement noted that they had considered the risks and uncertainties identified in the strategic report when forming their assessment of viability, disclosure of how those risks and uncertainties had been modelled in the viability scenarios was not always clear. The best disclosures clearly mapped the principal risks identified to the viability scenarios tested.
    • Most companies did not disclose information on how they were resilient to risks which could threaten either their going concern status or longer term viability.
    • The most common viability period selected was three years. While most companies disclosed why this was an appropriate period, explanations provided often failed to fully identify and consider all the relevant factors in determining this period. For example, companies should consider debt repayment profiles, the nature of the business and its stage of development, planning and investment periods etc.
    • In many cases, viability and going concern disclosures lacked sufficient detail to enable a reader to assess whether the assumptions used were consistent with those applied in other areas of the financial statements.

    6. LGIM publishes its UK Principles of Executive Pay 2021

    Legal & General Investment Management (LGIM) has published its investor guidelines (Guidelines) regarding executive pay, in which it sets out various principles which supports its Corporate governance and responsible investing policy (Investing Policy).

    The Guidelines echo many of the recommendations which already feature in the Investment Association's (IA) Principles of Remuneration (IA Principles) and the FRC's UK Corporate Governance Code (Code). That said, LGIM's Guidelines also contain its own spin on some of the IA's requirements, as well as including some unique recommendations, primarily focusing on fairness for the wider workforce, changes to reflect the impact of COVID-19, ESG-related factors, and remuneration policies and arrangements which prioritise simplicity.

    Noteworthy elements which are not already outlined in the IA Principles and/or the Code and which highlight those key points contained in LGIM's Investing Policy include:

    • To ensure employees avoid the poverty trap, remuneration committees should challenge management if a company is paying less than the real living wage (established by the Living Wage Foundation) and is not offering its employees the chance to work a minimum of 15 hours per week.
    • Companies should take into account current social sensitives, such as the impact of COVID-19, when considering the level of executive pay and, consistent with the IA Principles and Code, should ensure that salaries and pension payments are aligned with what is offered to the majority of the workforce.
    • LGIM will vote against the election of individual board directors where it does not support their remuneration for two consecutive years.  By way of reminder, LGIM publicly discloses its voting decisions, including the rationale for votes against management, one day after a shareholder meeting.
    • LGIM will not usually support one-off share awards or bonus schemes.
    • As regards the impact of COVID-19:
      • LGIM encourages the reduction of short-term annual bonus levels;
      • LGIM expects bonuses of 200 per cent of salary to be reserved for the largest global companies;
      • where there have been mass redundancies, LGIM would not expect bonuses to pay out at all; and
      • consistent with the IA, LGIM are intent on preventing windfall gains, and expect share award grants to be reduced to reflect any dip in share price at grant.
    • LGIM expects personal performance targets to be meaningful and quantifiable and recommends against heavy weighting of such targets. It prefers a threshold level of corporate financial measures to be met, before any personal target is triggered.
    • LGIM are fully supportive of ESG-related targets (as one would expect, given that it ties its own management's bonuses to ESG targets). Nevertheless, it would not expect ESG targets to be weighted in respect of more than one-third of the total award. For those companies in high-risk sectors, it expects to see awards reduced by at least 20 per cent if there have been fatalities. Further for those companies in the oil and gas sector, the use of volume growth targets (such as reserve replacement ratios or production targets) may result in a vote against remuneration policies. LGIM's view is that such targets risk incentivising overinvestment at a time when growth in demand seems increasingly uncertain. 

    7. LSE publishes 2022 Dividend Procedures Timetable

    The London Stock Exchange (LSE) has published its 2022 Dividend Procedures Timetable. By way of reminder, the LSE updates the timetable on an annual basis as a guide for companies with shares listed on the Official List or admitted to trading on AIM which should be used when setting their interim and / or final dividend programmes.

    Changes made to this latest iteration of the timetable include:

    • Clarification that deviations from the timetable must be notified to, and agreed with, the LSE's Corporate Actions Team (formerly its Stock Situations Team), and no other department of the LSE, in advance of announcement. To the extent that such discussions are undertaken through an adviser, the LSE states that it will assume that the company has ensured that any such adviser is sufficiently knowledgeable to discuss corporate action timetables and has access to corporate action newsfeeds, such as the Corporate Events Diary.
    • A reminder that if a dividend announcement is released which does not meet the guidelines in the timetable, the issuer may be required to make a further correcting announcement.
    • As regards "special dividends" which are made subject to an offer becoming unconditional in all respects (UIAR), the timetable states that the dividend will be marked "ex-dividend" one business day following the announcement of the offer becoming UIAR, or two business days following the announcement should it be made after 8.00am. The stated timings in the 2021 iteration of the timetable were two and three business days respectively.

    8. Dematerialisation of shares and use of electronic signatures

    As part of the second phase of the government's response to recommendations made by the Taskforce on Innovation, Growth and Regulatory Reform on how the UK can reshape its approach to regulation following the UK's withdrawal from the EU, the government has proposed:

    • Reforms to facilitate the dematerialisation of the minority of shares that are still held in paper, rather than electronic form. The government will work with industry, regulators and shareholders in the medium term to determine the best mechanism for converting these paper shares into electronic form, while preserving the rights of existing shareholders.
    • The creation of an independent, judicially-chaired industry working group of experts to look at increasing best practice and confidence in the use of electronic signatures and other electronic ways of executing documents.


    If you would like to receive future updates on Corporate Governance & Compliance please contact our Data Compliance Team.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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