Ashurst Governance and Compliance Update - Issue 32

1. Government departmental reform

The Prime Minister, Rishi Sunak, has created four new government departments meaning that the Department of Business, Energy and Industrial Strategy has been broken up. The new configuration of government departments is as follows:

• the Department for Energy Security and Net Zero is responsible for overseeing the UK's energy supply with the goal of bringing down household bills and halving inflation. The minister responsible is Grant Shapps;
• the Department for Science, Innovation and Technology has been tasked with driving the innovation that will deliver improved public services and grow the economy. The minister responsible is Michelle Donelan;
• the Department for Business and Trade is responsible for British business growth both in the UK and overseas, 'promoting investment and championing free trade'. The minister responsible will be Kemi Badenoch; and
• the 're-focused' Department for Culture, Media and Sport remains responsible for the creative arts. Lucy Frazer will be the culture secretary.

The changes took effect immediately with the transition programme being completed over the coming months.

2. BEIS consults on revised payments reporting regime

The Department of Business, Energy and Industrial Strategy (as was) has published a consultation designed to 'amend and improve' the regime of payment practices reporting currently found in The Reporting on Payment Practices and Performance Regulations 2017 (and in the equivalent LLP Regulations).

The consultation follows a statutory review of the Regulations which found that they have brought greater transparency to the payment practices and performance of large businesses. As such, the government believes that the policy which underpins the Regulations remains appropriate due to the ongoing need to ensure greater compliance in terms of prompt payment and to increase awareness of the performance of large businesses in this area.

BEIS is consulting on various 'enhancements' to the regime, including whether:

• the Regulations should continue in force beyond 6 April 2024 when they currently cease to have effect. The consultation is silent on how long the regime should be extended for;
• a further reporting metric requiring the reporting of the value of payments should be added to the Regulations. This would mean that not only the volume of invoices paid but also the total value of payments made within specified periods would need to be disclosed;
• in order to provide greater transparency and as proposed in the government's Restoring Trust in Audit and Corporate Governance White Paper, reporting businesses should be required to include their payment practices and performance information in their directors' report – i.e. as part of their annual report and accounts; and
• again in the interests of transparency, where more than one business within a group is required to report its payment practices and performance, these should all be included in the directors' report. This proposal seeks to address the concern that poor performing group companies could potentially be concealed if only a group summary of payment reporting is included in a directors' report.

The consultation also sets out proposals regarding: a clarification of how supply chain finance is reported; a new metric on disputed invoices; and retention payments in the construction sector.

Responses to the consultation should be submitted by 28 April 2023. The government will publish policy proposals and potential amendments to the Regulations within 12 weeks of that date.

The proposals to augment the content requirements of annual reports are unlikely to have gone unnoticed at the Quoted Companies Alliance which has recently published a report focused on the ever increasing length of those documents.

3. FRC updates 2021 Statement of Intent on ESG

The Financial Reporting Council has published an update to its 2021 Statement of Intent on Environmental, Social and Governance issues. By way of reminder, the Statement of Intent identified underlying issues with the production, audit and assurance, distribution, consumption, supervision and regulation of ESG information.

The updated statement records the FRC's ESG initiatives both in the UK and internationally since 2021 to assist and support stakeholders and drive best practice in high-quality and comparable ESG reporting and disclosure. One such initiative was the establishment in 2022 of the FRC ESG Group, an advisory body that provides cross-FRC thinking and responses to ESG challenges. Another initiative, underscoring the FRC's commitment to working internationally, is its regular engagement with the International Sustainability Standards Board including its responses to the ISSB's first two exposure drafts on sustainability reporting and climate-related reporting.

The statement also highlights the FRC’s key areas of focus regarding ESG reporting during 2023 which include engagement, projects and thematics on:

• ESG Data - considering how ESG data is communicated to the market and how investors, regulators and others consume ESG data to meet their needs.
• Materiality disclosures – considering enhancements to materiality processes so companies provide stakeholders with relevant and decision-useful information rather than ever longer reports.
• The UK Corporate Governance Code, where the FRC will revise the Code in a way that recognises the growing importance of ESG reporting.
• The link between investors and ESG reporting, such that the FRC's work and policies meet the need for decision-relevant ESG and climate reporting required by global markets.
• ESG in the Strategic Report, where the FRC will produce a comprehensive update to its Guidance on the Strategic Report.
• TCFD disclosures, where the FRC will publish a further report on metrics and targets for four key industries as part of its work to help develop a common policy for climate transition plans.

We will cover all of these issues in AGC updates as and when they are published.

As regards the role of auditors, the statement highlights that the FRC’s programme of audit quality inspections will continue to pay particular attention to the auditor’s work on climate-related risks, including the linkage between the audited financial statements and climate-related disclosures elsewhere in annual reports. This work will be supported by targeted thematic work including 'in-flight' reviews, where the FRC will look at how and to what extent these reports consider ESG matters. The PIE (Public Interest Entity) Audit Registration team will also consider identifying PIEs with significant environmental risk and monitoring whether the respective senior statutory auditor has completed appropriate and relevant training.

4. BEIS publishes independent review of net zero targets

The Department of Business, Energy and Industrial Strategy (as was) has published an independent review of the government's approach to delivering its net zero target, which includes recommendations relevant to UK companies.

The review by the Rt. Hon Chris Skidmore MP is split into two parts:

• Part 1 explains the opportunity and benefits to individuals and the economy. It places domestic action in an international context and emphasises that the UK must go further and faster to realise the economic benefits of net zero.
• Part 2 sets out how to achieve this opportunity across six pillars. It makes recommendations to catalyse action in individual sectors of the economy, and to enhance the role of local authorities, communities, and individuals to deliver net zero.

Of the 129 recommendations, those relevant to UK companies include:

• Recommendation 14: Incentivise financial disclosures and standards: The government should endorse and implement the International Sustainability Standards Board (ISSB) standards as soon as possible. In doing so, the UK should 'lead by example' and launch a formal adoption mechanism as soon as the ISSB standards are published. The UK should aim for 2024/25 as the first sustainability reporting cycle for companies in scope, encouraging companies to apply the standards voluntarily in 2023/24.
• Recommendation 15: Standard setting – transition plans, taxonomy, greenwashing and stewardship: The UK should continue its 'pioneering work' in transition plan disclosures led by the UK Transition Plan Taskforce and share them internationally. Once more developed, the Transition Plan Taskforce standards should be made mandatory for both listed and private firms to ensure comparable disclosure standards across the economy, in line with previous government commitments.
• Recommendation 68: Listings, capital raising and project finance: The government should review how the UK can become the most competitive financial centre for green and transition listings, capital raising and project financing. The review should include reviewing prospectus and listing regimes to encourage 'integrity and growth' in the market for green finance instruments, exploring new opportunities arising for professional services, climate and nature data and analytics and innovative product development.

The formal response of the government is awaited, but the setting up of the new Department for Energy Security and Net Zero may be seen as a positive step.

5. Register of Overseas Entities: BEIS updates guidance on registration and verification

The Department of Business, Energy and Industrial Strategy (as was) has published updated guidance for the registration of overseas entities on the Register of Overseas Entities. The guidance reflects recent changes to the statutory framework (see next item below) and also includes new guidance for overseas entities and verification agents.

Specifically, the revised guidance provides further insight into issues such as:

• What constitutes an overseas entity.
• How to identify registrable beneficial owners.
• The meaning of significant influence or control in relation to trusts and information required in relation to them.
• Information required for an application for registration.
• The duty to update information on the Register.
• Sanctions for non-compliance.

For an overview of the regime as a whole, see AGC update, Issue 14. For an overview on the impact of the regime on Real Estate Finance Transactions – click here.

6. Register of Overseas Entities: Verification of Information etc. Amendment Regulations in force

The Register of Overseas Entities (Verification and Provision of Information) (Amendment) Regulations 2022 (Amending Regulations) have been published, together with an Explanatory Memorandum. These are now in force and amend the Register of Overseas Entities (Verification and Provision of Information) Regulations 2022, which set out the regime for the verification of information submitted to Companies House by an overseas entity under Part 1 of the Economic Crime and Transparency Act 2022.

The purpose of the Amending Regulations is to address certain practical issues with the regime. For example, they exclude certain information from the verification requirement, including information which has previously been verified and submitted to Companies House as part of the discharge of the annual updating duty.

7. FCA consults on streamlining ESEF requirements

The Financial Conduct Authority has published a consultation paper (CP23/2) on proposed changes to streamline its existing rules for those UK issuers required to produce their annual reports using structured digital formats.
The regime is currently set out in DTR 4.1.14R and requires an issuer whose securities are admitted to trading on a UK regulated market to prepare its annual financial report in XHTML format. In addition, issuers which prepare consolidated financial statements using IFRS must include iXBRL tagging for basic financial information using a recognised taxonomy.

The FCA proposes to:

• Simplify the content and arrangement of the existing requirements by revoking the Technical Standard where they are currently set out, and inserting the key provisions directly into the DTRs. This will include implementing a new DTR which requires a relevant issuer to tag its annual financial statements using a ‘generally accepted taxonomy’.
• Issue guidance on ‘generally accepted taxonomies’ in a new Technical Note which can be updated more easily than is currently possible with the Technical Standard being used. This will allow the FCA to ensure that the regime remains aligned with generally accepted taxonomies being used in the market.

Responses to the consultation are required by 24 February 2023.