Ashurst Governance and Compliance Update - Issue 30

1. ISS publishes proxy voting guidelines for 2023

Institutional Shareholder Services has published its voting guidelines for 2023. The updated proxy voting policies will generally be applied for shareholder meetings taking place on or after 1 February 2023.

Amendments to the guidelines relating to remuneration reports and climate accountability are substantively the same as those consulted on and which we covered in AGC update, Issue 28.

Further policy changes of relevance to the UK include:

• Board diversity: For financial years beginning on or after 1 April 2022, ISS will consider recommending a vote against the nomination committee chair (or other directors on a case-by-case basis) if a premium or standard listed company has not achieved the board diversity reporting targets set by the Listing Rules – i.e. a board comprising at least 40 per cent women; at least one woman in a senior board position (chair, CEO, SID or CFO); and at least one director from a non-white ethnic minority background.
  
  For ISEQ 20 constituents and AIM-listed companies with market capitalisation over £500 million, ISS will generally recommend against the nomination committee chair (or other directors, case-by-case) if there is not at least one director who is a woman and if, by 2024, there is not one director from a non-white ethnic minority background.
  
  Mitigating factors include compliance with the relevant board diversity standard at the preceding AGM and a firm commitment, made publicly available, to comply with the relevant standard within a year.
• Audit committees: Recognising the importance and complexity of the committee's role, and the 'likely increased focus on audit committee oversight of the external auditor', ISS will note where four or fewer audit committee meetings have been held by a FTSE 350 company during the reporting period.
  
  For FTSE All-Share companies, excluding investment companies, ISS will draw attention to cases where three or fewer meetings have been held.
• Disapplication of pre-emption rights: ISS has amended its guidelines to reflect the Pre-Emption Group's updated Statement of Principles issued in November 2022. For more details, see AGC update, Issue 28.

2. FCA establishes new ESG data and ratings code of conduct working group

The Financial Conduct Authority has confirmed that it is establishing a new working group to develop a voluntary code of conduct for ESG data and ratings providers. It has also published associated terms of reference. This development is in response to the increasing reliance placed by financial services firms on third party ESG data and ratings services as firms integrate ESG into their activities and expand their ESG-focused products. It follows the FCA's June 2022 Feedback Statement on ESG integration in UK capital markets, in which the FCA expressed support for plans by the UK government to bring ESG data and ratings providers within the FCA regulatory perimeter.

3. EU MAR: ESMA updates its accompanying Q&A

The European Securities and Markets Authority has published an updated version of its 'Questions and Answers on the Market Abuse Regulation'. The latest version contains a revised Q&A on persons professionally arranging or executing transactions in the context of the prevention and detection of market abuse. By way of reminder, notwithstanding the UK's exit from the EU, the FCA will consider ESMA's Q&A, where relevant, when interpreting the provisions of MAR as applied in the UK.

4. FRC: What makes a good environment for auditor scepticism and challenge

The Financial Reporting Council has published a report which sets out examples of good practice to improve auditor scepticism and challenge. The report summarises what 'good' looks like and provides examples of commendable practice from the FRC's ongoing supervision work. The report will be required reading for audit committee members, and members of finance and internal audit teams.

The FRC has also published an associated research report focused on 'Audit Firm Culture' which explores the drivers and barriers to auditors exercising professional scepticism and effective challenge.

5. FRC publishes 2022 review of stewardship reporting

The Financial Reporting Council has published a 'Review of Stewardship Code Reporting'. This analyses how signatories to the UK Stewardship Code 2020, of which there are now 235, reported against it in 2022 and sets out the FRC's reporting expectations for the 2023 assessment year.

The FRC concludes that in the reports it has assessed it has seen effective stewardship reporting that is transparent about the purpose and approach of the organisation, and highlights progress made during the year. It notes improvements across many areas of reporting, including:

• The quality of activity and outcome reporting for engagement, collaboration and escalation.
• Signatories' contributions to addressing market-wide and systemic risks, and improving the functioning of financial markets.
• How signatories monitor and hold to account third parties, such as asset managers and service providers.
• Stewardship in asset classes other than listed equity, such as fixed income and real estate.

However, the FRC believes that there still needs to be greater emphasis by signatories on reporting their activities and outcomes during the reporting period, using both quantitative and qualitative evidence.

Part 2 of the report focuses on 'Engagement and exercising rights and responsibilities' and will be of particular interest to those in public company governance teams given that they will be at the sharp end of those activities.

6. FRC amends guidance for FRS 100

The Financial Reporting Council has published an updated version of its application guidance for FRS 100 (Application of Financial Reporting Requirements).

The amendments relate to the interpretation of 'equivalent' for various purposes and reflect changes to company law and decisions on equivalence following the UK's exit from the EU.

7. FRC consults on annual review of FRS 101

The FRC has also published a consultation on FRED 81: FRS 101 Reduced Disclosure Framework. The consultation follows the FRC's annual review which considers additional disclosure exemptions as International Financial Reporting Standards (IFRS) evolve. Based on that review, it proposes no amendments to the Framework this year. Comments on this approach and more generally should be submitted to the FRC by 28 February 2023.

By way of reminder, FRS 101 requires a company to apply EU-adopted IFRS subject to specified disclosure exemptions.

8. EU Council adopts Corporate Sustainability Reporting Directive

The Council of the EU has announced that it has adopted the proposed Corporate Sustainability Reporting Directive with no material amendments. The Directive is drafted to enter into force 20 days after publication in the Official Journal, and the new rules are required to be implemented by Member States within 18 months of that date.

For an overview of the impact of the Directive, including on UK incorporated companies doing business in the EU, please see AGC update, Issue 26.

EFRAG (formerly the European Financial Reporting Advisory Group) has submitted initial drafts of EU sustainability reporting standards to the European Commission. These will support the Corporate Sustainability Reporting Directive and, among other matters, contain:

• Standards dealing with general matters, including explaining the concept of 'double materiality', the value chain and how to prepare and present sustainability information, and general disclosures including on governance, strategy, and impact, risk and opportunity management.
• Specific standards on environmental disclosures, covering issues such as climate change, pollution, water and marine resources, biodiversity and ecosystems.
• Further specific standards on social disclosures, covering an organisation's own workforce, those in its supply / value chain, affected communities / customers, and governance.

9. EU Parliament approves gender balance Directive

The European Parliament has adopted, without amendments, the EU Council's Directive on the gender balance of boards of listed companies. For more detail on the Council's proposals, see AGC update, Issue 27.

By way of reminder, the Directive expects Member States to require that by 30 June 2026 at least 40 per cent of non-executive director positions in listed companies, or at least 33 per cent of all director positions, are held by members of the under-represented sex.

The proposed Directive will come into force on the twentieth day following its publication in the Official Journal, and will expire on 31 December 2038. Member States have two years following the entry into force of the Directive to implement it.