Legal development

Ashurst Governance and Compliance Update Issue 7

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    In this edition we cover the following

    Narrative financial reporting

    1. Mandatory climate-related disclosures by publicly quoted companies, large private companies and LLPs

    2. UK green labels and sustainability disclosures are coming – time to get ready

    3. Financial Reporting Lab publishes TCFD disclosure overview

    4. LSE publishes climate reporting guidance for listed companies

    5. FRC publishes Annual Review of Corporate Reporting 2020/21


    6. Government launches FTSE Women Leaders Review

    Corporate re-domiciliation

    7. Government launches corporate re-domiciliation consultation

     Insider dealing

    8. Penalties for insider dealing enhanced from 1 November 2021



    1. Mandatory climate-related disclosures by publicly quoted companies, large private companies and LLPs

    Building on the Green Finance Roadmap which we deal with in the next item, the government has published its response to its March 2021 consultation on mandatory climate-related disclosures by publicly-quoted companies, large private companies and LLPs. As regards companies, the new requirements will apply to the financial years of those in scope which begin on or after 6 April 2022.

    The government notes widespread stakeholder support for its proposals. In responding to feedback it has made two key changes to them:

    • the government is introducing a requirement for qualitative scenario analysis, which it believes to be a powerful tool to support companies in their assessment of climate-related risks and opportunities; and
    • the requirements will be more closely aligned with the recommendations of the TCFD recommendations, to ensure coherence with associated requirements being introduced elsewhere, including by the FCA in relation to premium-listed companies and the DWP in relation to occupational pension schemes.

    Companies and LLPs in scope

    The disclosure requirements will apply to:

    • all companies that are currently required to produce a non-financial information statement (NFIS), being UK companies which have more than 500 employees and have either transferable securities admitted to trading on a UK regulated market (such as the main market of the London Stock Exchange), or are banking companies or insurance companies;
    • UK registered companies with securities admitted to AIM with more than 500 employees;
    • UK registered companies which are not included in the above categories, which have more than 500 employees and a turnover of more than £500m; and
    • LLPs which have more than 500 employees and a turnover of more than £500m.

    Disclosure requirements

    Companies will be required to report climate-related financial information in their NFIS, and as part of their Strategic Report. The government plans to change the name of the NFIS to the "Non-Financial and Sustainability Information Statement". LLPs will be required to report this information in either their NFIS or the Energy and Carbon Report, which form part of their Annual Report.

    In scope companies and LLPs will be required to disclose climate-related financial information in line with the four overarching pillars of the Taskforce on Climate-related Financial Disclosure (TCFD) recommendations. As set out in the draft implementing regulations, the required disclosures are: 

    1. A description of the company's governance arrangements in relation to assessing and managing climate-related risks and opportunities.
    2. A description of how the company identifies, assesses, and manages climate-related risks and opportunities.
    3. A description of how processes for identifying, assessing, and managing climate-related risks are integrated into the company's overall risk management process.
    4. A description of the principal climate-related risks and opportunities arising in connection with the company's operations, and the time periods by reference to which those risks and opportunities are assessed.
    5. A description of the actual and potential impacts of the principal climate-related risks and opportunities on the company's business model and strategy.
    6. An analysis of the resilience of the company's business model and strategy, taking into consideration different climate-related scenarios.
    7. A description of the targets used to manage climate-related risks and to realise climate-related opportunities and of performance against those targets.
    8. A description of the key performance indicators used to assess progress against targets used to manage climate-related risks and realise climate-related opportunities and of the calculations on which those key performance indicators are based.

    The draft regulations contemplate that directors can omit climate-related disclosures if they “reasonably believe that, having regard to the nature of the company’s business, and the manner in which it is carried on, the whole or a part of a climate-related financial disclosure required by [paragraphs (5) to (8) above] is not necessary for an understanding of the company’s business..”. In doing so, a company will have to “provide a clear and reasoned explanation of the directors’ reasonable belief” as to why the omitted information is not necessary.

    Government guidance to help companies comply with these disclosure obligations will be published in due course.

    2. UK green labels and sustainability disclosures are coming – time to get ready

    HM Treasury has published a policy paper: "Greening Finance: A Roadmap to Sustainable Investing". The publication was eagerly anticipated, particularly in advance of the start of COP26, and, whilst not containing any particular surprises, sets out more detail what UK financial services firms and corporations can expect over the next few years. This includes:

    • the introduction of UK Sustainability Disclosure Requirements (which will feed into a green "labelling" system);
    • a UK Green Taxonomy; and
    • new stewardship requirements.

    More detail can be found in our Financial Regulation Team's update including:

    • a summary of which companies are in scope;
    • an overview of the application and content of the Sustainability Disclosure Requirements;
    • a timeline setting out their likely application; and
    • an explanation of how the UK Taxonomy is intended to work, to whom it will apply and when.

    3. Financial Reporting Lab publishes TCFD disclosure overview

    Given the requirement for premium listed companies to report against the TCFD recommendations on a "comply or explain" basis in the next reporting season, the Financial Reporting Lab (FR Lab) has published a report to help companies prepare. It includes practical advice and examples that address aspects of TCFD reporting extracted from the reports of voluntary early adopters. It also sets out questions to be addressed in relation to each of the four pillars of the TCFD recommendations.

    In addition, the FR Lab has also published a snapshot of the status of current reporting against the TCFD framework in the UK which, like the TCFD Status report highlighted in our previous update, notes increased uptake in the last year. The snapshot sets out how the TCFD framework operates, describes the UK regulatory and market context, and provides statistical analysis of current reporting practice in the UK.

    Given that one of the biggest challenges for companies adopting the TCFD framework is carrying out scenario analysis, the FRC has also published research by the Alliance Manchester Business School investigating climate-related scenario analysis in more detail. The research highlights the various approaches adopted by companies , instances of good practice, typical challenges faced, and the common steps taken to conduct the analysis.

    4. LSE publishes climate reporting guidance for listed companies

    The London Stock Exchange (LSE) has published guidance on climate reporting for companies on its markets, regardless of their sector, size or the stage of their climate "transition" journey. It is intended to provide practical advice on integrating best practice climate-related disclosures into financial reporting and forms part of the LSE's newly launched "Climate Transition Offering" which, in turn, seeks to enable preparations for the transition to a low-carbon economy and produce effective climate reporting. The guidance is intended to complement the LSE's 2020 publication "Your guide to ESG reporting".

    The guidance attempts to help companies understand the issues, grasp how they might apply in each company's particular circumstances, and take steps towards gathering and reporting the relevant information. Specifically, the guidance covers reporting and disclosure under the TCFD recommendations, based on a three step process highlighted below.

    • Step 1: Disclosure diagnosis and context: A company should understand the relevance of climate change and take stock of its current strategy and disclosure practices. The guidance sets out the current financial, political and regulatory landscape and a checklist to determine whether a company is providing sufficient information to investors.
    • Step 2: Integration of climate-related risks and opportunities: Once management recognises the context and need for action, they can begin to integrate climate-related considerations into their risk assessment and strategy development processes. Integration should be done from the top and should filter down through policies, processes and strategy.
    • Step 3: Disclosure of climate-related practices and data: Communicate the organisation's understanding through its disclosure of climate-related practices, strategy and objectives to investors and stakeholders.

    Alongside the guidance, the LSE has introduced "Climate Governance Scores" as a confidential resource for listed companies. This online tool is intended to help companies understand the key climate metrics important to investors, identify areas of improvement and assess their performance against industry peers.

    5. FRC publishes Annual Review of Corporate Reporting 2020/21

    The Financial Reporting Council has published its Annual Review of Corporate Reporting for 2020/21, together with an overview document: "Corporate Reporting Highlights (which contains a summary of the FRC's "Top ten findings" and expectations of reporting in the future). The Review principally deals with financial reporting; in the usual way, the FRC will publish further views on corporate governance reporting in due course.

    The FRC focused its reviews on larger companies, with 72 per cent of reviews attributed to FTSE 350 companies. Of the 246 reviews conducted in the year, 97 resulted in substantive questions being asked of companies which either sought additional information or further explanation. The majority of cases ended up with companies volunteering or agreeing to make improvements to their future disclosures, which the FRC indicates that it will check. Fifteen companies had to restate comparative information in their report and accounts.

    Highlights from the Review include:

    • The overall quality of reporting remains unchanged with there being no discernible decline due to Covid-19.
    • There were improvements in reporting in some areas, for example in the definition, labelling and reconciliation of alternative performance measures to their IFRS equivalents. The FRC remind companies not to give such measures undue prominence.
    • A reminder that strategic reports should address the positive and negative aspects of a company's development, performance, position and future prospects openly, and without bias. Companies should highlight and explain linkages between information presented within the strategic report and the annual report and accounts more broadly.
    • A further reminder of the specific statutory requirements around distributions, including the requirement to file accounts to support interim distributions in excess of retained earnings at the previous year-end.
    • The FRC emphasising that disclosures of judgments and assumptions about the future will remain important, particularly in relation to going concern and liquidity. The FRC expects companies to explain clearly significant judgements made by management, including those used in their assessment of going concern, with sufficient detail to enable users of accounts to understand the specific judgements made and their effect on the financial reports.
    • The FRC stating that it expects to see material climate change policies, risks and uncertainties discussed in narrative reporting and appropriately considered and disclosed in the financial statements, particularly where investors may reasonably expect a significant effect on the expected life or fair value of an asset or liability. Reporting by listed companies in line with the TCFD recommendations will be a key area of focus for the FRC in 2021/22.

    From an EU perspective, the European Securities and Markets Authority has published its priorities for EU corporate reporting regulators when examining the 2021 annual financial reports of listed companies. In relation to narrative financial reporting, priorities include:

    • the impact of the COVID-19 pandemic; and
    • climate-related matters.

    ESMA also reminds reporters to make the necessary preparations to fulfil the disclosure requirements of Article 8 of the Taxonomy Regulation, which comes into force on 1 January 2022, and that annual reports for the 2021 financial year must be prepared in accordance with the European Single Electronic Format.


    6. Government launches FTSE Women Leaders Review

    The government has announced that it will back a new five-year review to monitor women's representation in the leadership of FTSE 350 companies. The FTSE Women Leaders Review  will pick up where the Hampton-Alexander Review left off having overseen a 50% increase in women on FTSE boards in five years.

    To this end, the review has opened its online portal for FTSE 350 companies to submit their gender diversity data during November 2021, with the next annual report on the progress of FTSE 350 boards and leadership teams being published in February 2022. Meanwhile, the review is seeking new leadership to steer it, and take forward new targets over the coming years

    Meanwhile the Cranfield School of Management has published its Female FTSE Board Report 2021 which shows that, as at June 2021:

    • 37.7 per cent of FTSE 100 directorships were held by women (FTSE 250: 34.9 per cent) – this means that all boards have, in aggregate, met or exceeded the Hampton-Alexander Review targets;
    • 13.7 per cent of FTSE 100 executive directorships were held by women (FTSE 250: 11.3 per cent) demonstrating little progress since the 2020 report;
    • 44.4 per cent of FTSE 100 non-executive directorships were held by women (FTSE 250: 41.2 per cent) which is the highest proportion of female NEDs on record;
    • 27 per cent of FTSE 100 companies had female executive directors (FTSE 250: 18 per cent); and
    • 70 per cent of FTSE 100 companies have at least 33 per cent female directors (FTSE 250 67.6 per cent).

    In addition to in-depth statistical analysis, the report also includes the views of diversity and inclusion leads on inclusion practices and what has worked in their organisations.


    7. Government launches corporate re-domiciliation consultation

    The Department of Business, Energy and Industrial Strategy, HMRC and HM Treasury have published a consultation which proposes to introduce a corporate re-domiciliation regime. In short this would enable a foreign-incorporated company to change its place of incorporation to the UK while maintaining its legal identity as the same corporate entity, thus avoiding the need for dual-resident company structures and the like. It would bring the UK into line with various other jurisdictions including, Canada, Ireland, Luxembourg and various states in the USA.

    The consultation seeks feedback on several issues including:

    • the advantages of re-domiciliation compared to existing routes to relocate a company to the UK, and how material they are;
    • the likely level of demand for such a regime and from which jurisdictions it is likely to emanate;
    • aspects of other jurisdictions' re-domiciliation regimes which the UK should seek to replicate or avoid;
    • appropriate eligibility criteria for being able to re-domicile;
    • insolvency issues, including protections that should be adopted for creditors of companies which become insolvent shortly after re-domiciling;
    • the benefits of establishing an outward re-domiciliation regime and any potential associated conditions; and
    • any tax changes required to facilitate inward and outward re-domiciliation (including protections against tax avoidance).

    Views on the proposals are requested by 7 January 2022.


    8. Penalties for insider dealing enhanced from 1 November 2021

    Provisions in the Financial Services Act 2021 which extend the maximum sentence for the criminal offences of insider dealing from seven to ten years came in to force on 1 November 2021. For a link to the implementing regulations, click here. Companies should consider updating any references in training and other Market Abuse Regulation-related materials to reflect this change.



    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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