Ashurst Governance and Compliance Update - Issue 35

1. PLSA publishes Stewardship and Voting Guidelines for 2023

The Pensions and Lifetime Savings Authority has published its Stewardship and Voting Guidelines for 2023. These reflect a focus on shareholder engagement and include dedicated sections designed to help investors challenge how investee companies are managed. The Guidelines tackle issues such as board leadership and company purpose, division of responsibilities, audit, risk, climate change, the workforce and capital structure.

Key themes

The PLSA believes that three particularly relevant themes have emerged for the 2023 AGM season:

• Cost of living crisis and executive pay
  
  The PLSA states that appropriate remuneration policies are a litmus test for wider governance practices. The Guidelines recommend that remuneration structures and incentives for executive directors should cascade down to and allow all employees to share in the success of the business. They also encourage shareholders to vote against remuneration policies which are inconsistent with the standards in the Guidelines.
• Climate change and the environment
  
  As the pensions sector is now required to produce an annual Taskforce for Climate-Related Financial Disclosures (TCFD) report, including for all schemes with over a £1 billion in assets, the PLSA expects companies to reference TCFD in their reports so that investors can fully assess the extent of their climate risk. It also expects to see evidence of credible transition plans, given the likelihood that this will soon be a mandatory requirement (see Item 3 below).
  
  The PLSA specifically recommends that investors consider voting against an annual report if a company's 'operations are highly carbon intensive and there has been no disclosure of the climate-related assumptions which underlie their financial calculations, or where those assumptions are not consistent with the Paris Agreement'.
  
  The PLSA also recommends that investors consider whether transition plans are founded on credible targets. EY's latest research suggests that many companies have some way to go on this issue.
• Workforce issues and impact of operations on society
  
  The Covid-19 pandemic exposed growing sentiment towards the need to improve working conditions for staff. Mental health, alongside other wellbeing practices, should be at the heart of companies’ workforce concerns. On wider workforce practices, the PLSA states that companies must ensure that modern slavery is not taking place within their business or supply chains. A new section of the Guidelines reflects this focus.
  
  Companies are expected to continue progress towards the 2024 targets for ethnic diversity on FTSE 250 boards, as set out in the Parker Review. The PLSA also endorses the newly added 2027 Parker Review goals – see AGC Update, Issue 34.

Voting and other recommendations

Significant voting recommendations and policy positions for the 2023 AGM season (in addition to those above) include:

• Wellbeing and modern slavery
  
  Reflecting the focus on workforce, the PLSA recommends voting against the approval of a company's annual report if:
  • FTSE 100 companies do not have a formal approach to workplace wellbeing, including health management and disclosure;
  • after engagement initiatives with a company, there is insufficient progress on wellbeing activities disclosures; or
  • FTSE 350 companies fail to address the legal minimum requirements of the Modern Slavery Act.
  
  The re-election of a 'responsible director' should be opposed if a company that has been identified as highly exposed to modern slavery risks, or has been subject to a confirmed incident, fails to demonstrate adequate risk management and a willingness to change its approach, or if a company does not adopt sufficient measures to prevent, monitor, mitigate or remediate negative human rights impacts within its operations.
• Diversity and inclusion
  
  Investors should consider voting against the re-election of the Chair and the Chair of the Nomination Committee if a board consistently fails to move closer to (i) the new FCA requirements on D&I – see AGC Update, Issue 18 – or does not 'successfully' explain the reason for non-compliance, (ii) the FTSE Women Leaders Review targets on gender, and (iii) the Parker Review targets on ethnicity.
• Virtual AGMs
  
  The PLSA recognises the use of virtual AGMs in exceptional circumstances such as when government restrictions on movement are in place, otherwise it expects companies to allow for attendance in person.

2. Glass Lewis publishes EU Proxy Season Preview

Glass Lewis has published its 2023 EU Proxy Season Preview. This includes an overview of local governance, compensation, ESG trends and regulatory developments, along with a breakdown of how those issues will impact Glass Lewis’ benchmark voting policy and overall approach. Glass Lewis also provides background and details on notable AGMs where it expects the key themes of the proxy season to play out.

An overview of Glass Lewis' 2023 proxy voting policy guidelines can be found in AGC Update, Issue 29.

3. Government publishes updated Green Finance Strategy

The Department for Energy Security and Net Zero has published Mobilising green investment: 2023 green finance strategy, an update to its 2019 strategy initiative.

The 2023 update focuses on the need for green investment and on opportunities for the UK's financial and professional services sectors in light of the UK's target for net zero by 2050 and the environmental objectives in the government's Environmental Improvement Plan.

The update sets out how the government will meet its aim of becoming the world's first net zero-aligned financial centre. Next steps in 2023 include:

• Producing a framework to assess whether the International Sustainability Standards Board's disclosure standards are suitable for adoption in the UK.
• Issuing a call for evidence on Scope 3 Greenhouse Gas Emissions reporting to assess the costs and benefits of requiring the production of this information.
• Consulting on the delivery of a UK Green Taxonomy to support the quality of standards, product labels and disclosures.
• Consulting on the introduction of requirements for large UK corporates to disclose their transition plans (supported by the final Transition Plan Taskforce recommendations when published).
• Exploring how best the final Taskforce on Nature-related Financial Disclosure framework (expected in September 2023) should be incorporated into UK policy and legislation.

Members of our Financial Regulation and Environment & Safety teams delivered a webinar last week on this issue. To watch a recording, click here.

4. ESG ratings providers: the regulatory net has been cast

HM Treasury has published a consultation which proposes that the activities of ESG data ratings providers should come within the UK financial regulatory perimeter. This is no surprise given the concerns expressed about those activities at both the UK and international level. We consider the key issues in our briefing, here.

Item contributed by Lorraine Johnston, Partner in our Financial Regulation team

5. Government publishes Economic Crime Plan 2023 to 2026

The government has published its Economic Crime Plan 2023 to 2026. The plan builds on its predecessor Economic Crime Plan 2019 to 2022 and commits the government to:

• Reducing money laundering and recovering more criminal assets.
• Combatting kleptocracy and driving down sanctions evasion.
• Cutting fraud.

The plan sits alongside the forthcoming anti-corruption strategy and above the forthcoming fraud strategy.

Measures set out in the plan include:

• Limiting the abuse of corporate structures by implementing the Companies House reforms proposed in the Economic Crime and Corporate Transparency Bill (ECCT) currently making its way through Parliament.
• The introduction of a new 'failure to prevent fraud' offence via the ECCT, which will hold companies criminally liable for fraud conducted by an employee where reasonable procedures are not in place to prevent such conduct. The goverment has also published a fact sheet on the new offence.
• Increased investigative resources and investment in technology to detect money laundering and recover criminal assets.

Fraud and Anti-Corruption Strategies will be published in due course.

6. FRC publishes updated approach to audit supervision

The Financial Reporting Council has published an updated version of its Approach to Audit Supervision, first published in March 2021.

The publication serves three purposes:

• To aid accountability and transparency by describing what the FRC is seeking to achieve by audit supervision and how it achieves it.
• To communicate to the firms performing statutory audits of Public Interest Entities what the FRC expects of them, in both requirements and practices, and what they can expect from the FRC in the course of supervision.
• By setting out examples and case studies, to demonstrate the value of the FRC's approach to supervision.

The FRC will update the document again when it transitions to becoming ARGA – the Audit, Reporting and Governance Authority.

7. Companies House publishes revised PSC guidance

Companies House has published an updated version of its Guidance: Report a discrepancy about a beneficial owner on the PSC register.

The guidance has been updated to reflect changes to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 made by the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022, which came into effect on 1 April 2023.

Under the 2017 Regulations, a relevant person must report to Companies House any discrepancies between the beneficial ownership information regarding an entity it discovers as part of its initial customer due diligence process and the information held at Companies House.

The 2022 Regulations restrict the reporting requirement to 'material' discrepancies (such as incorrect names, dates of birth, nationalities and addresses) that can reasonably be considered to be linked to money laundering or terrorist financing or which conceal details of the customer's business. Discrepancies which arise during the course of a business relationship, rather than just at the outset of the relationship, must also be reported.

8. Companies House Direct and WebCHeck services to close in November 2023

Companies House has announced that its Companies House Direct and WebCHeck services will close on 30 November 2023. Users are instead directed to the Find and update company information service, which has replaced the majority of the functionality provided by Companies House Direct and WebCHeck.

9. FCA speech provides update on listing regime reform

In a speech delivered by FCA Chief Executive, Nikhil Rathi, on the reform of the UK capital markets ecosystem, helpful indications were given about the form of the impending FCA listing regime reforms.

By way of reminder, in May 2022, the FCA published DP 22/2: Primary Markets Effectiveness Review: Feedback to the discussion of the purpose of the listing regime and further discussion, in which the FCA sought views on an alternative single segment structure for the UK listing regime. More detail can be found in AGC Update, Issue 20.

DP 22/2 followed Lord Hill's UK Listing Regime Review (March 2021), which aimed to enhance London's attractiveness as a leading listing venue in a post-Brexit world and which forms part of a broader push for reform of UK capital markets.

A single listing category

In line with DP 22/2, the FCA confirms its proposal to replace the current standard and premium listing segments for shares in commercial companies with a single listing category with one set of eligibility requirements. The move to a single listing category and a focus on transparency, which would aim to give experienced investors the flexibility to form their own judgement in making investment decisions based on relevant disclosures, would include the following specific changes:

• The removal of eligibility rules requiring a three-year financial track record.
• A more permissive approach to dual class share structures.
• The removal of compulsory shareholder votes for large transactions and for related party transactions, whilst maintaining a disclosure regime.

The FCA expects to take forward the following:

• A streamlined sponsor regime.
• A single set of Listing Principles.
• Rules to protect shareholders from the solvent cancellation of a listing without a takeover offer or approval by a super majority of investors.

Whilst currently in outline form, the proposals indicate the FCA's direction of travel. Interestingly, the proposals also suggest a shift in approach in relation to the current significant transactions and related party regimes which FCA DP 22/2 proposed would be retained, forming part of the supplementary and mandatory set of continuing obligations respectively.

Next steps

The FCA confirms that it aims to publish a blueprint for further reform of the listing regime soon; a consultation paper could potentially be published as early as May. The FCA stresses that the listing regime is part of a wider capital markets ecosystem, which includes asset management, ESG labelling and the approach of UK pension funds to investment in UK equities, and all elements of this ecosystem need to be aligned.