Ashurst Governance & Compliance Update - Issue 41

Welcome to Issue 41 of our Ashurst Governance & Compliance update series, the aim of which is to keep you up to date on recent governance and compliance developments. If you have any questions on the content, please contact Will Chalk, Rob Hanley or any of those listed below.

Narrative and ESG reporting 

1. TNFD makes major development to sustainability reporting landscape

The Taskforce on Nature-related Financial Disclosures (TNFD) has published the final versions of its disclosure recommendations and guidance. 

The recommendations aim to provide organisations with a risk management and disclosure framework to assess their dependencies and impacts on nature, the nature-related risks and opportunities material to them, and to support disclosures as part of their annual financial reports.

Such disclosures are intended to provide decision-useful information to capital providers consistent with the International Sustainability Standards Board's IFRS Standards and the Taskforce for Climate-Related Financial Disclosures Recommendations.

The TNFD recommendations also accommodate the material information needs of other stakeholders aligned with a broader materiality approach. There are some subtle but important changes between the final TNFD version and previous beta versions. Our recent article here provides a summary of the key takeaways and developments to be aware of.

2. CLLS responds to review of non-financial reporting framework

The City of London Law Society (CLLS) has published a response prepared by a joint working party of the Company Law Committees of the CLLS and the Law Society of England and Wales to the Department for Business and Trade's Call for evidence: Non-financial reporting review. The review seeks views on the non-financial information UK companies are required to include in their annual reports (see AGC update 37) and considers potential options for updating the current non-financial reporting (NFR) framework to ensure it delivers useful information to the market. 

The CLLS response is broadly supportive of the government's review while suggesting that any changes to NFR disclosure requirements should ensure that the regime is proportionate and avoids undue duplication. 

The response highlights that there are overlapping disclosure requirements in the Listing Rules, DTRs and the UK Corporate Governance Code and suggests there should be greater alignment between the various requirements. Consolidating the legislative NFR framework would also help make the regime more accessible and make compliance more transparent. It  also suggests there is significant scope for simplifying the size and qualification thresholds for NFR information. 

3. FCA publishes Vote Reporting Group consultation 

The FCA has published a consultation and discussion paper from the Vote Reporting Group. The consultation proposes a voluntary, standardised and comprehensive ‘vote reporting template’ for asset managers to use when communicating their voting activity to their asset owner clients.

The FCA established the Group in November 2022 as an independent working group to build an industry consensus for a voluntary, comprehensive vote reporting template for UK asset managers. The Group has 31 members from across industry drawn from the key trade associations and is independently chaired. 

The aim of the consultation is to build industry consensus on a voluntary vote reporting template for asset managers in the UK. The template should provide asset owners with more consistent, up-to-date and comparable data, allowing them to make timely and accurate decisions while increasing reporting efficiency for asset managers. 

The template builds upon the SEC's ‘Form NP-X’ in the US while also having regard to other widely used industry frameworks and templates. 

4. EU proposes adjustments to corporate reporting thresholds

The European Commission has published for consultation, a proposal amending Directive (EU) 2013/34 concerning adjustments of the size criteria for micro, small, medium-sized and large companies.

The explanatory notes state that the European Commission considers it necessary to amend the monetary size criteria in Directive (EU) 2013/34, namely, the balance sheet total and the net turnover, for determining the size category of a company by 25 per cent to adjust for the effects of inflation. 

The adjustments would mean that many of the EU financial and sustainability reporting requirements will not apply to those companies which might, in the future, be classified as micro, small and medium-sized companies.

The consultation is open for feedback until 6 October 2023.

Audit and governance reform

5. Delays to the audit reform package possible 

According to the Financial Times, 'The government is preparing to omit a much-delayed overhaul of the UK’s audit and corporate governance regimes from its programme of flagship legislative reforms for the coming year.' The FT believe that the primary legislation needed to take forward aspects of the reform package will not be included in the King's Speech on 7 November 2023 due to a lack of available time in the next Parliamentary session.

This means that the creation of the successor body to the FRC, the Audit, Reporting and Governance Authority or 'ARGA' may not come to fruition until 2026 or 2027. It is also likely to mean that the new regime whereby ARGA can hold directors accountable for breach of their duties in relation to financial reporting will be delayed. Its impact on the extension of reporting requirements to a new category of 'size-based' Public Interest Entities – see AGC update Issue 39 – remains to be seen.

It is considered unlikely that any delay will affect the roll out of the revised UK Corporate Governance Code, the consultation in relation to which closed last week. This is still expected to apply to financial periods beginning on or after 1 January 2025. However, it may delay the Audit Committee Minimum Standard becoming mandatory – on which more can be found in AGC update – Issue 37.

By way of reminder, the Quoted Companies Alliance is intending to review its own governance code, adopted by the majority of AIM companies, 10 years on from its first publication. It has also published a report on the influence of the QCA Code on the main market (standard segment), AIM and AQSE. 

Equity capital markets

6. FCA publishes Primary Market Bulletin No 45 with a focus on ISSB Standards

The FCA has published Primary Market Bulletin 45, which covers the implementation of ISSB standards for listed companies, the audit of financial statements by third country audit firms and the application of transitional provisions in relation to minimum market capitalisation for shell companies. It also includes a reminder to issuers that the FCA has introduced multi-factor authentication (MFA) for its systems and that the option to skip MFA registration when logging into the Electronic Submission System (ESS) will end soon.

International Sustainability Standards Board: IFRS S1 and S2

In June 2023, the International Sustainability Standards Board (ISSB) published its first two IFRS Sustainability Disclosure Standards (ISSB standards): IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures). Both build on and incorporate the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Individual jurisdictions will decide whether companies will be required to comply with the standards. The UK government has committed to introduce mandatory reporting against them.

The FCA has indicated that it will update its existing TCFD-aligned disclosure rules for premium and standard listed companies once IFRS S1 and S2 are adopted in the UK. The government aims to make endorsement decisions on the first two ISSB standards to create UK Sustainability Disclosure Standards (UK SDS) by July 2024. UK SDS are not expected to divert from the reporting baseline established by the ISSB standards unless absolutely necessary to accommodate UK-specific matters.

In the first half of 2024, the FCA states that it will consult on proposals to implement disclosure rules for listed companies that reference UK-endorsed IFRS S1 and S2. Assuming the government's endorsement process is completed by the middle of 2024, the FCA aims to finalise its policy position by the end of 2024, with the new requirements applying to financial years beginning on or after 1 January 2025. The FCA anticipates that reporting under UK SDS will start from 2026.

The scope and design of the new disclosure rules will be considered alongside the FCA's proposals to reform the existing UK listing regime for equity shares. The FCA also expects to consult on moving away from the current 'comply or explain' approach in favour of mandatory disclosures for listed companies.

At the same time the FCA will consult on its guidance for disclosures relating to listed companies' transition plans, which describe a company’s targets and actions (such as reducing greenhouse gas emissions) for transitioning to a lower-carbon economy. The guidance will be aligned with the Transition Plan Taskforce’s final disclosure framework, which is expected to be published in October 2023.  

Audit of financial statements by third country audit firms

An issuer which is a UK-traded third country company (within the meaning of section 1241 of the Companies Act 2006) must ensure that its auditor is registered with the Financial Reporting Council as a third country auditor. 

Where the FCA becomes aware that a published audit report has not been provided by a registered third country auditor, the FCA will temporarily suspend the issuer's listing under LR 5.1.1 R. The suspension will remain in place until the issuer has published the required audit report.

7. SEC rules on public company cybersecurity disclosures

The US Securities and Exchange Commission has adopted final rules requiring disclosure of material cybersecurity incidents and periodic disclosure of a registrant’s cybersecurity risk management, strategy and governance in annual reports. The Commission has also adopted rules requiring foreign private issuers to make comparable disclosures.

The new rules will require registrants to disclose on the new Item 1.05 of Form 8-K any cybersecurity incident they determine to be material and to describe the material aspects of the incident's nature, scope, and timing, as well as its material impact or reasonably likely material impact on the registrant. 

The new rules also add Regulation S-K Item 106, which will require registrants to describe their processes, if any, for assessing, identifying, and managing material risks from cybersecurity threats, as well as the material effects or reasonably likely material effects of risks from cybersecurity threats and previous cybersecurity incidents.

A Fact Sheet relating to the new rules can be found here.

8. HMRC publishes draft legislation to preserve current 0 per cent charge on UK share issues on overseas markets

HMRC has published a policy paper consulting on proposals to ensure the existing 0 per cent charge to stamp duty and stamp duty reserve tax (SDRT) on the issue of UK shares on overseas markets via depositary receipt systems and clearance services will continue to apply after the end of 2023. 

The proposals preserve the current position under retained EU law, which will be revoked at the end of 2023 under the Retained EU Law (Revocation and Reform) Act 2023. The government has also published draft legislation for technical consultation ahead of its inclusion in the next Finance Bill. 

The consultation will close on 12 October 2023 and the new measures are expected to take from 1 January 2024.

UK legislation currently provides for a 1.5 per cent stamp duty and SDRT charge on the issue of UK securities into depositary receipt systems (such as American depositary receipts) and clearance services, as well as for certain transfers linked to capital raisings. 

Following decisions by the European Court of Justice and the UK courts in 2009 and 2012, HMRC recognised that these charges were contrary to the EU Capital Duties Directive 2008/7/EC and no longer collected the tax, although the relevant legislation was not repealed as taxpayers could rely on the direct effect of EU law. The new measure is necessary to maintain the status quo.

The government is currently considering broader proposals to modernise the stamp taxes on shares framework.

Corporate Governance

9. Directors Duties: High Court confirms decision in ClientEarth v Shell plc 

The High Court has confirmed its earlier decision to refuse permission for ClientEarth, the environmental non-profit organisation, to pursue a derivative claim under Part 11 Companies Act 2006 against the directors of Shell plc for alleged breaches of duty.

ClientEarth alleged that Shell's directors' approach to managing climate change risk was flawed and that inadequacies and deficiencies in Shell's strategy meant, among other things, that the Shell directors were in breach of their duty to promote the success of Shell (under s.172 of the Companies Act 2006) and their duty under to exercise reasonable care, skill and diligence (s.174 2006 Act). 

After its initial application on the papers alone was dismissed by the High Court, ClientEarth exercised its right to ask the High Court to reconsider its decision at an oral hearing.

Dismissing ClientEarth's further application, Trower J held that ClientEarth had failed to establish a prima facie case that the directors acted in breach of their duties. In addition, by making an adverse costs order against ClientEarth, the Court indicated that such claims carry significant financial risks for applicants.

Our 'Six key takeaways' from the rejection of the initial application can be found here.

10. FRC publishes revised list of UK Stewardship Code signatories

The Financial Reporting Council has announced a record number of successful signatories to the UK Stewardship Code.  

There are now 277 signatories to the Code, representing £44.6 trillion assets under management. This includes 189 asset managers, 69 asset owners and 19 service providers. 

The FRC reported continued growth in the assets, other than listed equity, covered by the Code, and continued progress in the reporting of stewardship activities and outcomes by signatories, such as improving board diversity at investee companies and improving disclosure related to climate change and biodiversity.

Diversity

11. UK government called on to mandate ethnicity pay gap reporting

ShareAction and Runnymede Trust have called on the UK government to adhere to its 2018 commitment to mandate Ethnicity Pay Gap reporting for workplaces with 250 or more employees. 

Ethnicity Pay Gap reporting would work in much the same way as gender pay gap reporting requirements.

In addition, ShareAction and Runnymede Trust have called for the introduction of requirements for employers to publish an 'action plan' to address any issues identified and for the government to carry out a two-year review to track the progress made by these organisations.

Separately, ShareAction has flagged it will be 'working with a coalition of investors to ensure that the companies they hold shares in have procedures in place for robust Ethnicity Pay Gap reporting'. 

Authors: Will Chalk, Partner; Rob Hanley, Partner; Marianna Kennedy, Senior Associate, Becky Clissmann, Counsel