Ashurst Governance and Compliance Update Issue 7
04 November 2021
In this edition we cover the following |
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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 |
Diversity 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 |
NARRATIVE FINANCIAL REPORTING |
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1. Mandatory climate-related disclosures by publicly quoted companies, large private companies and LLPsBuilding 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:
Companies and LLPs in scope The disclosure requirements will apply to:
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:
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 readyHM 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:
More detail can be found in our Financial Regulation Team's update including:
3. Financial Reporting Lab publishes TCFD disclosure overviewGiven 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 companiesThe 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.
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 2020/21The 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:
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:
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. |
DIVERSITY |
6. Government launches FTSE Women Leaders ReviewThe 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:
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. |
CORPORATE RE-DOMICILIATION |
7. Government launches corporate re-domiciliation consultationThe 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:
Views on the proposals are requested by 7 January 2022. |
INSIDER DEALING |
8. Penalties for insider dealing enhanced from 1 November 2021Provisions 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.