Ashurst Governance and Compliance Update Issue 11

1. Climate-related disclosure – FCA extends reporting to standard listed issuers and augments guidance for all relevant issuers

The Financial Conduct Authority has published a Policy Statement (PS21/23) which extends the application of its climate-related financial disclosure requirements to issuers of standard listed shares and Global Depositary Receipts (GDRs). By way of reminder, the FCA Handbook already requires premium listed commercial companies to disclose climate-related information in annual reports in accordance with the Financial Stability Board's Taskforce on Climate-related Financial Disclosures (TCFD) for accounting periods beginning on or after 1 January 2021.

The Policy Statement also sets out the intended direction of travel as standards for corporate reporting on climate and sustainability matters evolve, albeit that it does not provide feedback on the discussion topic raised in the original consultation on 'ESG integration in UK capital markets'. A response on this will follow in the first half of 2022.

The FCA has also published its final policy to introduce TCFD-aligned disclosure requirements for asset managers, life insurers, and FCA-regulated pension providers (PS21/24). Our Financial Regulation team will cover this in due course.

Standard listed issuers in scope

The new reporting requirement applies to issuers of:

• standard listed equity shares;
• standard listed GDRs representing equity shares; and
• standard listed shares other than equity shares.

In each case, the requirements do not extend to standard listed investment entities and shell companies.

Further engagement is planned on extending the regime to issuers of standard listed debt and 'debt-like' securities under LR17.

Substance of the reporting requirements

The new rule (LR 14.3.27R) mirrors that in place for premium listed commercial companies (LR 9.8.6R(8)) such that in-scope standard listed issuers must set out:

• whether they have made disclosures consistent with the TCFD’s recommendations and recommended disclosures in their annual financial report;
• where they have not made disclosures consistent with some, or all, of the TCFD’s recommendations and/or recommended disclosures, an explanation as to why, and a description of any steps they are taking or plan to take to be able to make consistent disclosures in the future, and the timeframe within which they expect to be able to make those disclosures;
• where they have included some, or all, of their disclosures against the TCFD’s recommendations and/or recommended disclosures in a document other than their annual financial report, an explanation of why; and
• where in their annual financial report (or other relevant document) the various disclosures can be found.

The FCA has also included guidance to support in-scope companies in making their disclosures, as set out in LR 14.3.28G to LR 14.3.31G. This is also aligned with guidance relevant to premium listed commercial companies. Note that there is no requirement for issuers to have third party audit or assurance of their TCFD disclosures, albeit that the FCA intend to keep this under review.

Application

The rules will apply to in-scope standard listed issuers for financial periods beginning on or after 1 January 2022.

Guidance on metrics, targets and transition plans

The FCA has incorporated references to the TCFD’s new guidance on metrics, targets and transition plans in both its existing and new guidance provisions (LR 9.8.6C G(5) and LR 14.3.29 G(5) respectively); it has also updated references to the TCFD's implementation annex. Both changes are, therefore, of relevance to in-scope premium and standard listed issuers. The FCA has done so to 'keep pace' with the TCFD’s work and maintain international consistency.

The FCA has also introduced an additional guidance provision related to the TCFD’s finalised guidance on transition plans (LR 9.8.6 F and LR 14.3.32 G). Specifically, it sets out that, where making disclosures on transition plans as part of its strategy disclosures under the TCFD’s recommendations and recommended disclosures, a listed company that is headquartered in, or operates in, a country that has made a commitment to a net zero economy (such as the UK’s commitment under the Climate Change Act 2008 (Order 2019)) is encouraged to assess the extent to which it has considered that commitment in developing and disclosing its transition plan. Where it has not done so, it is encouraged to explain why.

The FCA encourages companies to consider the SASB metrics for their sector when making their TCFD disclosures.

ESG-related Technical Note also updated

Technical Note 801.1, which clarifies existing disclosure obligations in relation to ESG matters for a wide scope of issuers, has also been updated to reflect the new rules and associated guidance as well as to reflect minor changes to certain references to EU legislation.

Disclosure expectations and supervisory strategy

Finally , the FCA has reminded in-scope issuers of its disclosure expectations and supervisory strategy which it set out in Primary Market Bulletin 36, summary of which can be found in Ashurst Governance and Compliance update, Issue 8.

2. PERG publishes latest review of narrative reporting in private equity

The Private Equity Reporting Group has published its 14th annual report on the private equity industry's conformity with the Walker Guidelines. It has also published, in conjunction with PwC, an updated version of its guide to good practice reporting by portfolio companies.

PERG's findings include that the Covid-19 pandemic is still having an impact on many portfolio companies but there has broadly been a shift back to normal reporting timelines. All portfolio companies reviewed complied with the disclosure requirements in the annual report, and 67% prepared disclosures to at least a good standard, but none produced excellent disclosures.

Good quality disclosures were noted in the areas of board composition, employees, and financial position and performance, while significant improvements were noted in relation to environmental and business model reporting. Areas requiring improvement include disclosures related to non-financial key performance indicators and gender diversity.

PERG states that, in conjunction with the BVCA, it intends to undertake a detailed review of the Guidelines in 2022. This will take into account changes to the narrative reporting landscape, as well as increased stakeholder interest in the private equity industry following high-profile transactions involving well-known UK-based businesses. The report sets out a 'roadmap' for reviewing the guidelines, which could lead to revised guidelines coming into effect in 2023-24.

In the interim, PERG believes that relevant portfolio companies should:

• Improve and enhance the depth of disclosure on environmental matters.
• Improve and enhance disclosures on gender diversity to cover policies and actions to promote diversity (including other characteristics such as ethnicity and sexual orientation). Narrative should be provided in addition to the numerical disclosures required by the Guidelines.
• Improve the level of disclosure on non-financial KPIs that are monitored by the company to assess its performance, for example employee-related matters.
• Focus on improving the timeliness and accessibility of reports as businesses and economies come out of the pandemic. PERG noted fewer delays in publication compared with 2020 and encourages private equity firms to be proactive.
• Review guidance to improve reporting including the PwC Good Practice Guide for portfolio companies, and other guidance published by the Financial Reporting Council on the strategic report and climate/energy reporting. They should also consider other linked requirements, including reporting on how directors have complied with their duty under s172 of the Companies Act 2006.

The Good Practice Guide outlines various key themes and recommendations to assist those drafting annual reports. These include:

• A strategically focused base to the annual report narrative should provide a clear template to address all matters. This will provide a framework for the explanation of significant issues, outline throughout how the business addresses areas of strategic focus and ensure stakeholders have an insight to the driving governance behind operational activities.
• Making connections will create a cohesive report that provides clear linkage on matters that are important to stakeholders and ensure a greater level of insight. This is particularly important with an area like principal risk assessment to ensure this addresses strategic aims and is specific to the business.
• Being clear on the timeline and scale of activity will create a dynamic picture of progress and enable a broader understanding of the business. This is particularly important for forward looking information to make it more tangible to the stakeholder and not a baseless aim or suggestion with no conviction.

3. FCA confirms range of taxonomies which can be used

By way of reminder, DTR 4.1.14R and the UK Transparency Directive European Single Electronic Format (TD ESEF) Regulation require certain issuers to produce their annual financial report in a machine-readable electronic format.

In CP21/27, the FCA consulted on minor changes to the TD ESEF to provide issuers with more choice of taxonomy to use when tagging their financial reports.

The FCA has now published Handbook Notice No.94 which, among other matters, sets out its response. In short, the revisions will allow relevant issuers to choose from the following taxonomies when tagging their statements in relation to financial periods beginning on or after 1 January 2021:

• The core taxonomy – i.e. the 2019 version of the ESEF taxonomy.
• The ESEF 2020 taxonomy as set out in EU legislation.
• The UKSEF 2021 taxonomy and the UKSEF 2020 taxonomy, both issued by the FRC.

For financial years beginning on or after 1 January 2022, the permitted taxonomy is the UKSEF 2022 taxonomy. This excludes the ESEF 2021 taxonomy because it has yet to be adopted in EU law. The FCA will permit its use once it is in force in the EU.

The Handbook changes are now in force.