2022 AGM and reporting season

Introduction

This briefing summarises developments to be aware of when preparing for 2022 annual general meetings and compiling the narrative aspects of annual reports. It is aimed principally at premium listed companies. It also covers some relevant developments for standard listed companies, AIM companies and large private companies. It may also be useful for such companies who choose voluntarily to comply with the UK Corporate Governance Code (Code) and any other legal or regulatory requirements applying to premium listed companies.

Considerations for 2022 AGMs

On AGMs, we: 

• Consider what 2022 holds for AGMs given the continued impact of COVID-19 for a third consecutive season.
• Explore 'say on climate' resolutions which have increased in number in 2021.
• Take a brief look at other resolutions including to amend articles of association.
• Note key points from various updated voting guidelines which may impact 2022 AGMs.

Considerations for 2022 narrative reporting

On narrative reporting, we:

• Cover current and proposed climate-related reporting requirements.
• Consider remuneration reporting which always remains of interest to investors.
• Note publications from the Financial Conduct Authority, Financial Reporting Council and others on how companies can improve their corporate governance reporting.
• Explore significant proposals from the FCA to improve diversity performance and reporting.
• Consider a variety of other developments, including charting the progress of the new International Sustainability Standards Board.

A.  Considerations for 2022 AGMs

1.  AGMs in 2022

In this section, we consider: (i) the continuing impact of COVID-19; (ii) AGM format and methods of engagement; and (iii) AGM guidance. 

COVID-19

On 19 January 2022, the Prime Minister announced the removal of many COVID-19 related restrictions. 

Nonetheless, the pandemic still continues and boards must continue to pay close attention to any COVID-19 guidance and, should it materialise, any new relevant legislation both when sending the notice out and at the time of the meeting. The health and safety of all participants remains paramount; flexibility and preparation remain vital.

As with the previous two years, the wording and tone of AGM notices and announcements should be carefully considered. This is particularly the case as regards the extent to which a company chooses to encourage or discourage shareholder attendance and as regards any permitted health and safety measures as well as measures to augment shareholder engagement.

Permitted health and safety measures to safeguard attendees at meetings can include some or all of the below. 

AGM format and engagement

Options for holding AGMs remain threefold (i) traditional physical meetings, (ii) hybrid meetings (i.e. a physical meeting with an electronic component allowing electronic voting) and (iii) fully virtual meetings (with no physical element). As has been the case for some time, several institutional shareholder groups including the Investment Association (IA) (see its 2017 Position Statement) still do not favour fully virtual meetings. There also still remains doubt as to the validity of such meetings under the Companies Act 2006. 

Hybrid AGMs. According to PLC What's Market's Insights and Trends report for 2021 (PLC WM 2021 review), whilst many companies amended their articles of association in 2021 to facilitate hybrid meetings (see section A.3 below), the number of companies actually holding hybrid meetings, although increasing, remains low. The review notes some 23 companies held hybrid AGMs in 2021. The table which follows contains some tips for hybrid meetings. 

Hybrid AGMs are still relatively new. While some have been an undoubted success, for many the lack of shareholder engagement with the model means that the cost benefit analysis is yet to be compelling. Companies should consider, amongst other things, the nature of their shareholder base, the views of their shareholders and the costs and logistics involved before proceeding with such a format. 

Physical AGMs. For the above reasons, and COVID-19 permitting, physical AGMs seem likely to be the option that many companies will prefer in 2022. In our 2021 season briefing, we noted the FRC's encouragement for companies to augment their shareholder engagement at physical AGMs. The FRC's guidance 'AGMs: An opportunity for change' (October 2020), includes an Annex of Best Practice Guidance and some suggestions are set out in the next table by way of reminder.

According to the PLC WM 2021 review, during 2021, of 272 companies surveyed, some 85 per cent (83 FTSE 100 and 149 FTSE 250 companies) permitted questions in advance of the AGM, and some 74 per cent (75 FTSE 100 and 127 FTSE 250 companies) included a statement in their notice as to how answers to shareholder questions would be provided. 20 companies held a separate shareholder event as well as an AGM. 

Although companies should consider appropriate means to facilitate shareholder engagement, they should also, given uncertainty caused by COVID-19, continue to stress in their AGM notices that shareholders should appoint the chair of the meeting as their proxy to vote on their behalf in order to ensure that their vote will be counted if ultimately they (or any other proxy they appoint) are not able to attend the meeting.

AGM guidance

There is a considerable body of guidance on AGMs that companies may find useful. The key ones are set out below by way of reminder.

• February 2021, Corporate Governance Institute (CGI, formerly ICSA) – 2021 general meetings and the impact of COVID -19. This was issued at a time of lockdown and when rules limiting gatherings and travel were in place. Nevertheless, much of the guidance remains useful including analysis of legal issues and good practice recommendations.
• January 2021, GC100, discussion paper - Shareholder Meetings – Time for Change. Overall aims of the paper include broadening engagement from geographically-diverse shareholders and stakeholders and encouraging the updating of legislation to better meet the needs and expectations of companies and the communities within which they operate.
• October 2020, FRC guidance – AGMs: An opportunity for change. This includes best practice guidance on matters such as meeting preparation, facilitating questions, using webcasts and proxy voting.

2.  Say on climate resolutions

We first mentioned 'say on climate' resolutions in our 2021 AGM season briefing. The number of such resolutions have increased in 2021 and the views of proxy advisers and others have developed. In this section, we look at (i) what we have seen in 2021, (ii) Glass Lewis's (GL) approach and (iii) Institutional Shareholder Services' (ISS) approach. 

What we have seen in 2021

Say on climate resolutions were proposed at some 13 FTSE 350 2021 AGMs, a significant increase on 2020. In a further change from 2020, most resolutions were proposed by management. 

The resolutions vary as to their purpose, although the most common types were (i) for board proposed resolutions - seeking approval of climate transition plans/strategies and (ii) for shareholder requisitioned resolutions - requesting the company to disclose more, particularly by way of its climate-related targets. 

Perhaps unsurprisingly, companies most affected were in the oil and gas, mining and utilities sectors (e.g. Glencore, BP, National Grid, BHP, Severn Trent, SSE and Royal Dutch Shell). There were also several financial institutions (e.g. Barclays, HSBC, Aviva and Investec).

All board-proposed say on climate resolutions were passed. All shareholder-requisitioned resolutions failed, but it is noteworthy that the IA Public Register shows that resolutions at two companies (BP and Royal Dutch Shell) received over 20 per cent support. As a consequence both companies made statements in accordance with Provision 4 of the Code on what actions they intend to take to consult shareholders to understand the reasons behind the vote, and both gave subsequent updates on views received and actions taken. 

Proxy advisers and others have concerns about say on climate resolutions. Both GL and ISS have confirmed their policies during 2021 which we consider below.

Glass Lewis

In November 2021, GL published its ESG Insights 2022 Policy Guidelines. The ESG guidelines focus on the rights of shareholders to propose certain ESG-related resolutions, and are aimed in particular at those countries where shareholder resolutions are relatively common. This means that much of it is not relevant for the UK. However, the ESG guidelines set out GL's detailed views on say on climate resolutions. 

Broadly, GL supports robust disclosure by companies of climate strategies and climate-related risks and opportunities. However, it has concerns with say on climate votes for a number of reasons. Fundamentally, it believes that a company’s business strategy is best set by the board, which has a fiduciary duty to shareholders and it does not wish to see the board abdicate this responsibility, whether in whole or in part, to shareholders. It also has concerns that shareholders are being asked to make voting decisions with potentially incomplete information, for example as to operational changes and related costs. 

GL and shareholder proposals. When shareholders request companies propose a say on climate vote, GL will generally recommend voting against. When evaluating such proposals, it will note and potentially consider: the substance of the proposal; the company’s existing climate governance framework, initiatives and reporting; the company’s industry and size; and the company’s exposure to climate-related risks. It will look more sympathetically on requests for the production of climate transition plans which are disaggregated from proposals for shareholders to be given a vote on these plans. 

Institutional Shareholder Services

In December 2021, ISS issued its Benchmark Policy Updates and Proxy Voting Guidelines for the UK and Ireland for meetings taking place from 1 February 2022. For more on other changes to the guidelines, see section A.4 below, but here we cover ISS's policy on say on climate resolutions. 

ISS and shareholder proposals. ISS will vote on a case-by-case basis on shareholder proposals that request a company to disclose a report providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan and provide shareholders the opportunity to express approval or disapproval of its GHG emissions reduction plan. In doing so, ISS will take into account information including: the completeness and rigour of the company’s climate-related disclosure; the company’s actual GHG emissions performance; and whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to its emissions. It will also consider whether the proposal is unduly burdensome (as to its scope or timeframe) or overly prescriptive.

3.  Other resolutions

Resolutions to amend articles

Continuing the upward trend from 2020, considerably more companies amended their articles of association in 2021. According to the PLC WM 2021 review, 37 per cent of 272 companies (39 FTSE 100 and 61 FTSE 250 companies) amended their articles of association. Of these, 92 were amendments for electronic attendance at meetings and a substantial number stated that the proposed amendments did not permit the holding of virtual only meetings, i.e. were to facilitate hybrid meetings. 

As we noted in last year's briefing, it remains the case that that the IA and ISS do not support virtual only AGMs, whilst GL is more relaxed subject to certain undertakings being given as regards shareholder information and participation. Companies should continue to ensure that any changes to articles of association to facilitate electronic meetings are clear that they do not intend to allow virtual only meetings. 

Other common changes to articles of association, continue to include changes to: give companies greater flexibility regarding the treatment of untraceable shareholders and unclaimed dividends; allow companies greater flexibility on how they pay dividends including the ability to compel a shareholder to receive a dividend by bank transfer rather than cheque; and increase the cap on non-executive director fees.

In December 2021, the FCA issued its feedback statement and final rules following its Primary Markets Effectiveness Review (CP 21/21). Among the changes, LR 13.8.10 (amendments to constitution) has been amended. It now provides (effective 10 January 2022) that where a circular includes a summary of the proposed changes to articles of association, as is often the case, there must be a statement that the full terms of the proposed amendments will be available for inspection: at the place of the general meeting for at least 15 minutes before and during the meeting (same as before); and on the national storage mechanism from the date of sending the circular. The latter relaces the previous physical inspection requirement which had required that full terms should be available for inspection at a place at or near the City of London. 

For completeness, note that this change has also been made to LRs 13.8.11 and 13.8.14 as regards employees' share scheme and long-term incentive schemes. 

Failed resolutions and significant dissent

Headline points from the PLC WM 2021 review include the following. 

• Similar total number of failed resolutions – 24 in 2021 (23 in 2020).
• More failed pre-emption disapplication resolutions - 7 in 2021 (2 in 2020).
• More substantial votes against (20-49.9 per cent) directors' remuneration resolutions: 33 against annual remuneration reports in 2021 (17 in 2020) and 17 against remuneration policy in 2021 (15 in 2020).

4.  Updated voting guidelines

In this section we cover: (i) IA priorities for 2021; (ii) investor approach on pensions; (iii) ISS's 2022 policy updates; and (iv) GL's 2022 policy updates.

IA shareholder priorities 2021 

At the time of writing, the IA's 2022 shareholder priorities for listed companies document have not been published. By way of reminder, the IA shareholder priorities for listed companies, January 2021 outlines: areas that IA members want to be prioritised and their expectations; actions the IA will take including the approach of the its governance arm – the Institutional Voting Information Service (IVIS); and progress made. The table below highlights the key changes in the areas of climate change and diversity, although note these could become more onerous when the IA 2022 priorities are published. As and when they are published, we will cover them in a subsequent Ashurst Governance and Compliance Update.

Pensions and voting: 2022 investor approach

IA. In November 2021, the IA reiterated its guidance that pension contributions for executive directors should be fully aligned with a company's wider workforce by 31 December 2022.

To support this position IVIS will:

• Red Top any new remuneration policy that does not explicitly state that an appointed executive director will have their pension contribution set in line with the majority of the workforce.
• Red Top any remuneration report where executive pension contributions are not aligned to the majority of the workforce or where there is no credible action plan to align pension contributions for incumbent directors by the end of 2022.

GL expects that new executive directors should be appointed on the same level of pension contribution as the wider workforce. While it recognises that pension rates for incumbents may need to be reduced over time, it does expect additional disclosure regarding a remuneration committee's commitment to reduce such contributions for incumbent executives by the end of 2022.

ISS. The latest ISS guidelines also highlight that they will be paying close attention to the extent to which director pension contributions are aligned with the wider workforce.

ISS 2022 proxy voting guidelines

In December 2021, ISS published its Benchmark Policy Updates and its Proxy Voting Guidelines for the UK and Ireland for meetings taking place from 1 February 2022. Key updates, as well as its approach on say on climate resolutions already discussed in section A.2 above, include: 

• New policy on board accountability on climate for significant GHG emitters. ISS will generally vote against the chair of the board of "significant GHG emitters" where ISS determines that a company is not taking the "minimum steps" needed to understand, assess and mitigate climate change risks to the company and the larger economy. "Significant GHG emitters" are those on the current Climate Action 100+ Focus Group list (which comprises 167 focus companies and which can be accessed from the CA100+ website).
  
  Minimum steps to understand and mitigate those risks for 2022 are listed and focus on: (i) detailed disclosure of climate-related risks (such as set out by the TCFD, including board governance measures; corporate strategy; risk management analysis; and metrics and targets) and (ii) appropriate GHG emissions reduction targets. Targets for scope 3 emissions are not required for 2022 but should cover at least a significant portion of the company’s direct emissions.
• Policy on gender diversity. ISS has slightly bolstered its policy on board gender diversity. As mentioned in our briefing last year, ISS will generally recommend against the nomination committee chair (or other directors on a case-by-case basis) in: (i) FTSE 350 companies where the board does not comprise at least 33 per cent women; and (ii) in AIM companies with a market capitalisation over £500 million, FTSE SmallCap companies and ISEQ 20 companies where there is not at least one woman on the board (investment trusts are excluded). However, this year there is a reduced list of mitigating factors that ISS will consider where these targets have not been met.
• Policy on ethnic diversity. ISS will generally recommend a vote against the chair of the nomination committee (or other directors on a case-by-case basis) of a FTSE 100 board (excluding investment companies) that has not appointed at least one person from an ethnic minority background to the board.
  
  Certain other companies (FTSE 250; FTSE SmallCap; ISEQ 20; and AIM companies with a market capitalisation of over GBP 500 million) are expected to disclose a roadmap towards compliance with the same target by 2024.
• Environmental, social and governance (ESG) performance conditions for executive remuneration. ISS will allow ESG performance conditions to be used in executive remuneration but targets should be material to the business and quantifiable, and there should be a clear link between the objectives chosen and the company's strategy.

GL 2022 guidelines

GL has published its 2022 policy guidelines for the UK for meetings taking pace from 1 January 2022 and its 'Approach to executive compensation given COVID-19'. Key changes include:

• Diversity of ethnicity. GL will generally recommend against the re-election of the chair of the nomination committee at a FTSE 100 board that has failed to appoint at least one director from a minority ethnic group and has not given a clear and compelling reason why.
• Remuneration committee performance and accountability. GL may recommend that shareholders vote against the re-election of the remuneration committee chair where there are substantial concerns with the remuneration policy presented and/or the pay practices outlined in the remuneration report. In particularly egregious cases or where there are ongoing concerns with a company’s remuneration policy or practices, GL will continue to recommend that shareholders vote against the re-election of all remuneration committee members.
• Environmental and social risk oversight. GL will generally recommend that shareholders vote against the re-election of the governance committee chair (or equivalent) of FTSE 100 companies that fail to provide explicit disclosure on the board’s role in overseeing material environmental and social issues.

Other voting guidelines

Neither the Pensions and Lifetime Savings Association nor Pensions Investment Research Consultants have published their updated voting guidelines at the time of writing. We will cover these in a subsequent Ashurst Governance and Compliance Update where appropriate. 

B.  Considerations for 2022 narrative reporting

1.  Extensions for publication of financial information

In January 2021, the FCA and FRC issued a joint statement and the London Stock Exchange also issued an Inside AIM edition, each reminding companies that COVID-19-related extensions continue to apply to the publication of financial information (see table). 

At the time of writing, these extensions continue to apply, but it is likely that they could be withdrawn if COVID-19 recedes.

2.  Climate related financial reporting

The impetus behind climate-related financial reporting by increasing numbers of entities continues. The table below provides a summary before we consider in more detail (i) requirements for premium listed companies; (ii) requirements for standard listed companies; (iii) requirements for publicly quoted companies, large private companies and LLPs; and (iv) other developments including proposals for company net zero transition plans.

Premium listed companies: TCFD reporting

The basics. We set out in the table below the basics of the TCFD reporting regime for premium listed companies. For more detail, see our January 2021 client briefing New Climate-Related Reporting in Annual Financial Reports by Premium Listed Commercial Companies.

 Recent FCA TCFD-related developments and publications. Since implementing TCFD reporting for premium listed companies, the FCA has issued some additional guidance both in the LRs themselves and elsewhere, as follows. 

• Transition plans. The FCA has introduced further guidance on transition plans (in LRs 9.8.6 F and 14.3.32) for both premium and standard listed companies. It requires that, when making disclosures on transition plans as part of strategy disclosures under the TCFD 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 (2050 Target Amendment) 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. This new guidance is applicable for financial years beginning on or after 1 January 2022 although companies may decide to comply earlier voluntarily.
• Metrics and targets. The FCA has also incorporated references in LRs 9.8.6C and 14.3.29 to the TCFD's new guidance on 'Metrics, Targets and Transition Plans' and the TCFD's latest 'Implementation annex'.
• FCA expectations and supervisory strategy. In November 2021, the FCA published Primary Market Bulletin, Issue No. 36 in which it set out further information on its TCFD-related disclosure expectations and supervisory strategy. In short, the FCA emphasises that while it will be responsible for monitoring and, where necessary, enforcing compliance with the TCFD reporting Listing Rules requirements applicable to premium and standard-listed issuers, the FRC will also play a significant role given its regulatory role scrutinising annual reports.
• Updated technical note on ESG. The FCA has issued an updated Technical Note: Disclosures in relation to ESG matters, including climate change (801.2). It replaces previous Technical Note (801.1) and includes minor updates to reflect the extension to standard listed issuers and the new guidance mentioned above.
• FCA consultation on new TCFD technical note 802.1. The FCA has also issued a consultation on a new technical note on TCFD aligned climate-related disclosure requirements for listed companies. The consultation closed on 13 December 2021.

Other TCFD-related guidance. As well as FCA guidance, other guidance has been published to assist companies with TCFD reporting.

• Financial Reporting Lab (FR Lab) report on 'TCFD ahead of mandatory reporting: developing practice'.This aims to help companies prepare for TCFD reporting and includes practical advice as well as examples 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.
• FR Lab 'Reporting framework snapshots: TCFD reporting'. This short document sets out how the TCFD framework operates, describes the UK regulatory and market context, and provides statistical analysis of current UK reporting practice.
• FRC published research on 'Climate scenario analysis: current practice and disclosure trends'. This report aims to shed light on why and how companies get started with climate scenario analysis. It highlights practical steps, challenges and best practices. It considers process, approach and governance adopted by companies (including the teams, functions and committees involved and how scenarios are selected and modelled) as well as outcomes (including how climate scenario analysis outcomes influence strategic planning and decision-making and the extent, and quality, of reporting of findings to external stakeholders).
• London Stock Exchange guide on 'Understanding climate risk and opportunity: Your guide to climate reporting'. The guide is aimed at London-listed companies, regardless of sector, size or stage of their transition journey, to support best practice as regards the TCFD recommendations. It aims to help companies understand the issues and start gathering and reporting the relevant information.

For completeness, it is worth noting that in 2021 the FR Lab issued further guidance in the area of climate change:- Streamlined energy and carbon reporting and Reporting on risks, uncertainties, opportunities and the use of scenarios.

Standard listed companies: TCFD reporting

In December 2021, the FCA published a Policy Statement (PS 21/23) which extends the application of its climate-related financial disclosure requirements beyond premium listed companies to certain standard listed companies. Those newly in scope are issuers of; (i) standard listed equity shares; (ii) standard listed GDRs representing equity shares; and (iii) standard listed shares other than equity shares. 

The rules and applicable guidance are found in LR 14.3.27 et seq. for issuers of standard listed equity shares and by virtue of LR 18.4.3 for issuers of GDRs and of shares other than equity shares. They apply for financial periods beginning on or after 1 January 2022 and so first reporting in compliance by such companies will be published in 2023. The new guidance mentioned above on metrics, targets and transition plans is also of application to such issuers.

Other companies: "TCFD-aligned" reporting

In October 2021, the Government published its response to its consultation on mandatory climate-related disclosures by publicly-quoted companies, large private companies and LLPs. On 17 January 2022, the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 were made. They come into force on 6 April 2022 for financial years of those in scope beginning on or after that date. First reporting in compliance will be published in 2023. The disclosure requirements will apply to:

• all companies that are currently required to produce a non-financial information statement (NFIS), being UK companies that 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 £500 m; and
• LLPs which have more than 500 employees and a turnover of more than £500 m

As with the existing NFIS, subsidiaries are exempted if they meet specified conditions as set out in section 414CA (8) of the Companies Act 2006 one of which is inclusion in the group strategic report 
In-scope companies and LLPs will be required to disclose climate-related financial information "in line with" the four overarching pillars of the TCFD recommendations as follows:

Companies will be required to report climate-related financial information in their Strategic Report in a newly named '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.

The 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 [the asterisked paragraphs in the table 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 the new disclosures will be published in due course, but is not available at the time of writing. 

Other climate and sustainability reporting related developments

In October 2021, the Government published its Greening Finance Roadmap. Amongst its proposals, the Government plans to introduce mandatory requirements for listed companies (among other organisations) to publish net zero transition plans setting out how they intend to adapt in the transition to a low-carbon economy. To that end, it has published a Fact Sheet which contains guidance and more detail on what a transition plan is and what will be required. It plans to launch a high-level 'Transition Plan Taskforce' to develop standards for transition plans and associated metrics which should report by the end of 2022. For more on the roadmap, see our Financial Regulation Update here. 

In November 2021, the International Sustainability Standards Board was set up. See section B 6 below for more on this. 

3.  Remuneration reporting

The IA, ISS and GL were quick to recognise that companies needed to adapt their remuneration policies over the past two years to show alignment between executive pay and the experience of key stakeholders, particularly their workforce, in light of COVID-19. Reputational risks remain high for companies making unjustified or inappropriate payments to executive directors which are not sensitive to the impact of the pandemic on company performance. ESG also remains a hot topic, with proxy advisors emphasising the importance of linking ESG measures to executive pay-outs. 

The main developments this year are outlined below. These focus largely on the principles and guidelines published by the IA, ISS and GL. 

IA on COVID-19 and remuneration 

The initial waive of the COVID-19 pandemic and its aftermath resulted in tailored guidelines on shareholder expectations for executive remuneration practices during the pandemic. The most recent IA Principles of Remuneration, published in November 2021, noted that IA's earlier guidelines published in April 2020 on "Shareholder Expectations on Executive Remuneration during the COVID-19 pandemic" continue to remain relevant. Companies should continue to acknowledge and adhere to them, where relevant. Key points include the following.

ESG performance metrics 

IA. The IA strongly emphasises the need for companies to incorporate ESG performance targets into LTIP and bonus arrangements. In particular, the IA highlights that where companies have already incorporated the management of material ESG risks and opportunities into long-term strategy, committees should use these pre-identified ESG risks to develop performance conditions for variable remuneration. 

ISS. ISS is similarly encouraging of ESG-related performance criteria, and provides examples of areas for companies to focus on, including consumer and product safety, environment and energy, labour standards and human rights, workplace and board diversity, and corporate political issues. ISS notes that there is no one size-fits-all approach and that the litmus test is whether the metric enhances shareholder value. 

GL. Whilst GL generally encourages the use of ESG performance metrics, they urge investors to be wary, noting that the inclusion of ESG metrics in variable remuneration should be appropriate for each company’s unique circumstances. GL highlights that certain ESG performance goals are longer term in their nature and are therefore more realistically suited to long term incentive plans, which are typically measured over a three year vesting period (e.g. reduction in carbon targets), whilst other ESG goals suit short term annual bonuses (e.g. social and human capital targets, like reducing the gender pay gap). 

Each of the IA, ISS and GL emphasise the importance of fulsome disclosure of ESG metrics.

Remuneration reporting research 

In May 2021, the FRC published a research report in conjunction with the University of Portsmouth focused on 'Changes in remuneration reporting following the UK Corporate Governance Code 2018'. The research examined the remuneration policy disclosures made by a sample of FTSE 350 companies during periods both before and after the introduction of the 2018 version of the Code. It also analysed shareholder voting on companies' revised remuneration policies and assessed the impact of the Code's new Principles and Provisions in this area. The report draws attention to where improvements in remuneration reporting need to take place.

4.  Corporate governance reporting

In this part we cover FRC publications dealing with (i) areas of supervisory focus for 2022/2023 (ii) annual review of corporate governance reporting, (iii) key matters for 2021/2022 reports and accounts and (iv) workforce and wider stakeholder engagement, and section 172 reporting.

FRC areas of focus

In December 2021, the FRC announced its areas of supervisory focus for 2022/23, including priority sectors, thematic reviews and audit quality inspections. Priority sectors are: travel, hospitality and leisure; retail; construction and materials; and gas, water and multi-utilities. Six thematic reviews will be conducted in 2022 including one on TCFD reporting. Audit quality inspections will pay particular attention to auditor work in several areas including climate related risks and fraud risks. 

FRC corporate governance reporting review

In November 2021, the FRC published its second annual review of corporate governance reporting. The review notes a general improvement in reporting against the Code compared with 2020 including on stakeholder engagement, audit and some areas of risk reporting. Generally, the FRC continues to encourage:

• Less boilerplate and declaratory statements with more focus on describing actions and outcomes of governance.
• Greater clarity as to how a company is applying the Code’s Principles as well as clearer explanations where there are departures from Code Provisions. Examples of the FRC's expectations as to explanations for departures from the Code are set out, together with those Provisions of the Code where the FRC has detected "undisclosed non-compliance". The FRC also reminds companies of its 2021 publication:' Improving the quality of 'comply or explain' reporting'.

Particular areas where the FRC wishes to see improvement are set out in the next table. 

The FRC also noted that during 2021 it undertook a pilot project in which it raised matters with a few companies on areas outside the FRC’s current statutory enforcement remit, including stakeholder engagement.

FRC key matters for reports and accounts in 2021/2022. In October 2021, the FRC published its'Key matters for 2021/22 reports and accounts'. It is primarily targeted at CEOs, CFOs and Audit Committee chairs but likely to be helpful for all preparers, reviewers and auditors. It replaces the annual year-end advice letter and highlights key messages, FRC publications and recent changes to corporate governance and narrative and financial reporting.

This letter is customarily preceded by the FRC's annual review of corporate reporting (note, this is a different report from the review of corporate governance reporting discussed above). The most recent annual review was published in October 2021 along with a highlights document. 

All three documents show areas that are likely to be monitored closely by the FRC in 2022 and so act as a warning to companies of areas to consider carefully. Whilst many aspects concern financial statements and are beyond the scope of this update, some key general narrative reporting aspects are set out in the table below. 

Workforce and wider stakeholder engagement, and section 172 reporting.

As noted above, workforce and stakeholder engagement and section 172 reporting will remain key areas of focus in 2022. 

In May 2021, the FRC published 'Workforce Engagement and the UK Corporate Governance Code: A Review of Company Reporting and Practice'. It presents the findings of research conducted on workforce engagement practices of, and reporting by, FTSE 350 companies and specifically the recommendation for boards to ensure effective workforce engagement under the UK Corporate Governance Code 2018. The research contains case studies describing differing approaches and elements of good practice. (For more detail see Ashurst Governance and Compliance update, Issue 1).

In July 2021, the FR Lab published Reporting on stakeholders, decisions and Section 172. The report highlights that information on stakeholders and on decisions can help investors understand how a company is progressing in fulfilling its stated corporate purpose and achieving long-term success. The FR Lab believes that section 172 statements can then be a helpful bridge between the two types of information.

Each section of the report includes examples reflecting ways of addressing some aspects of reporting highlighted by investors. The first two sections of the report also include questions for companies to consider. The final section builds on the tips on approaching Section 172 statements published by the Lab in October 2020.

5.  Diversity reporting

Diversity in its broadest sense continued to attract focus and momentum in 2021. In this section, we summarise the key areas of focus as regards (i) gender diversity reporting, (ii) ethnicity reporting and (iii) FCA proposals for a significant boosting of regulation in this area. (See also the points on diversity in the table in section B 4 of this briefing on the FRC Review of Corporate Governance Reporting; and note also the FR Lab July 2021 report on 'Board Diversity and Effectiveness in FTSE 350 Companies').

Gender diversity reporting

In February 2021, the Hampton-Alexander Review published its fifth and final report on improving gender balance in FTSE leadership. Amongst other things the report considers that:

• There should be a successor review body that proposes a 40 per cent target for women on boards. The FTSE Women Leaders Review, a new five-year review, was launched by the Government in November 2021 but has yet to announce its leadership or targets.
• As best practice, companies should have a woman in at least one of the four senior board roles: Chair, SID, CEO or CFO.
• Companies should publish a gender pay gap for their board and executive committee.

More recent statistics on female representation can be found in the November 2021 report of Cranfield University and in the December 2021 Spencer Stuart Board Index. For example, the Cranfield report states that 21 per cent of FTSE 100 boards and 32 per cent of FTSE 250 boards have yet to reach the Hampton-Alexander target of 33 per cent women on boards. 

Ethnicity reporting

As at 12 March 2021, the Parker Review stated that 81 FTSE 100 companies had ethnic minority representation on their boards. The PLC WM 2021 review (November 2021) noted that 123 FTSE 350 companies (70 FTSE 100 and 53 FTSE 250) disclosed in their annual report that their board comprises at least one director of colour. By way of reminder, the Parker Review set a target of one board director of colour for the FTSE 100 by 2021 and for the FTSE 250 by 2024. 

FCA consultation on diversity and inclusion on company boards and committees

In July 2021, the FCA published a consultation paper, CP21/24, which proposes significant changes to the FCA Listing Rules, as well as changes to the Disclosure Guidance and Transparency Rules, on board and senior management diversity. The consultation is now closed and the FCA response is awaited.

For the Listing Rules, the FRC is proposing a 'comply or explain statement' on whether relevant companies have achieved proposed targets for gender and ethnic minority representation on their boards, and as part of the same annual disclosure, data on the make-up of their board and most senior level of executive management as regards gender and ethnicity. See the table for key aspects of the proposals.

As regards its DTRs proposals, the FCA proposes to amend existing DTR 7.2.8AR to encourage considerations of broader diversity aspects within diversity policies and related disclosures by companies in their AFRs. See the table below for the key aspects of the DTRs proposals.

6.  Other reporting developments

Structured electronic reporting

Having been delayed by a year, the requirements (DTR 4.1.14R) for listed issuers to produce their consolidated annual financial reports (i.e. those required for listed companies by FCA rules and not UK 2006 Act statutory accounts) in machine-readable (XHTML) format and to tag basic information in accordance with a taxonomy apply in relation to financial periods beginning on or after 1 January 2021, with the requirement for the tagging of notes applying for financial years starting on or after 1 January 2022. The detail of the requirements is beyond the scope of this update, nevertheless during the year there have been numerous publications and updates of which in-scope reporters should be aware.

DTR 6.3.5 (use of unedited full text for announcements)

As mentioned earlier, in December 2021, the FCA issued its feedback statement and final rules following its Primary Markets Effectiveness Review(CP 21/21). 

Amongst changes, DTR 6.3.5 has been amended to provide that an issuer or person who discloses regulated information is exempt from the requirement to communicate it to the media in unedited full text if: (a) the regulated information in unedited full text has been filed with the FCA by uploading it to the national storage mechanism; (b) the regulated information has been communicated to the media; and (c) the communication contains a statement that the regulated information is available in unedited full text on the national storage mechanism. 

Where the above exemption applies, the announcement relating to the publication of certain regulated information, namely announcements to make public annual financial reports, half yearly financial reports and reports on payments to governments, must also include an indication of the website on which the relevant documents are available. 

In conjunction with the above, the previous requirement that certain information (broadly that which would be required to be disseminated in a half-yearly financial report) needed to be published in unedited full text in AFR RIS announcements has also been removed. 

This helpful change removes the complex and unnecessary full text disclosure requirement for the above mentioned RIS announcements to the extent that the conditions above are satisfied.

International Sustainability Standards Board

We reported in last season's briefing on growing calls for global sustainability standards to facilitate clear, consistent and comparable sustainability disclosures and on the consultation paper on sustainability reporting issued by the International Financial Reporting Standards Foundation Trustees. The consultation period ended on 31 December 2020. 

In February 2021, the Trustees issued a press release noting that feedback received indicated that there is a need for a global set of internationally recognised sustainability reporting standards. 

Since then, in November 2021, the Trustees announced the creation of the new standard-setting board—the International Sustainability Standards Board (ISSB). A chairman has been appointed and a vice-chair and members are being sought. 

Showing progress towards reducing fragmentation in this area, the Trustees also announced that two other bodies working in this space would join the ISSB by June 2022. These are (i) the Climate Disclosure Standards Board (CDSB) and (ii) the Value Reporting Foundation (VRF) (the VRF was itself the result of a combination, in 2021, between the International Integrated Reporting Council and the Sustainability Accounting Standards Board).

The intention is for the ISSB to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.

To this end, the Technical Readiness Working Group (TRWG)(comprised of, amongst others, the TCFD, IFRS, CDSB and VRF and with the aim of allowing the ISSB to have a running start) produced two protype standards for the new ISSB to consider on (i) general requirements for disclosure and (ii) climate-related disclosures. 

Once the ISSB is up and running, it will consider these protypes as part of its initial work programme. It will hold public consultations to inform the ISSB’s work plan and on proposals informed by recommendations from the TRWG. Following these consultations, the ISSB’s work will follow the IFRS Foundation’s rigorous due process, including public discussions by the ISSB of feedback received to the consultations and possible improvements to the proposals prior to their finalisation as standards.

Annual modern slavery reporting

As mentioned in our 2021 season briefing, after a long consultation period, the Government confirmed in 2020 that it will be bringing forward reforms to the transparency reports employers have to publish under the Modern Slavery Act. However, it remains yet to do so. Among other things, those aspects of a modern slavery statement that are currently voluntary will become mandatory and there will be a single new reporting deadline. More information about the proposed changes is contained in our briefing here.

We still do not yet know when these reforms will take effect as the Government has said only that it will bring forward the necessary legislation "when parliamentary time allows". Nevertheless, organisations would be well advised to plan ahead and consider what systems and processes they will need to put in place to ensure they are able to comply with the new requirements when the time comes.

The government portal for filing modern slavery statements was set up in March 2021.

Annual gender pay reporting

Private and voluntary sector employers with 250 or more employees have to publish data on their gender pay gap by 4 April each year. In 2021 this deadline was pushed back by six months to 4 October 2021 due to the continued effects of the pandemic, although employers were encouraged to report by the original deadline if possible. As things currently stand, a gender pay gap report will need to be published in April 2022. The Government is also due to review the gender pay regulations by April 2022 and publish a report on its conclusions as to whether they meet the government’s policy objectives. For more on other employment issues for 2022, see our briefing –Top Employment Issues For 2022.

Appendix - The UK Corporate Governance Environment in 2022 (a non-exhaustive list of publications (with links), which may be useful during the 2022 AGM and reporting season).