Essential Corporate News: Week ending October 25, 2019

ESMA: European common enforcement priorities for 2019 annual financial reports published

On October 22, 2019 the European Securities and Markets Authority (ESMA) issued its annual public statement setting out the European common enforcement priorities and other considerations for 2019 annual financial reports of listed companies (Public Statement). When monitoring and assessing the application of all relevant requirements, ESMA, together with national enforcers, will pay particular attention to the areas highlighted in the Public Statement alongside issues that are material for the individual issuer.

In section one of the Public Statement, ESMA sets out priorities in relation to IFRS financial statements, for the 2019 year-end. These include:

• specific issues related to the application of IFRS 16 Leases;
• follow-up of specific issues related to the application of IFRS 9 Financial Instruments for credit institutions and IFRS 15 Revenue from Contracts with Customers for corporate issuers; and
• specific issues related to application of IAS 12 Income Taxes (including application of IFRIC 23 Uncertainty over Income Tax Treatments).

ESMA also highlights potentially significant implications of the transition from one interest rate benchmark rate to another on financial reporting and the importance of timely disclosure of its consequences.

In relation to non-financial information, in section two of the Public Statement, ESMA draws issuers’ attention to specific requirements relating to the sections of the annual financial report focusing on environmental and climate change related matters, key-performance indicators and the use of disclosure frameworks and supply chains.

With regard to the application of the ESMA Guidelines on Alternative Performance Measures (APMs), ESMA notes that issuers should provide disclosures that enable investors to understand the extent of, and rationale for, any changes to the APMs used and highlights that APMs should not be displayed more prominently than, and should be consistent with, measures directly stemming from financial statements.

ESMA also notes that it expects issuers to undertake all necessary steps to comply with the new European Single Reporting Format requirements published on May 29, 2019 which will apply to financial statements for financial years beginning on or after January 1, 2020. ESMA also highlights the importance of closely monitoring the developments relating to Brexit and providing appropriate disclosures on its impact.

(ESMA: European common enforcement priorities for 2019 annual financial reports, 22.10.19)

FRC: Climate-related corporate reporting - Where to next?

On October 21, 2019 the Financial Reporting Council's (FRC) Financial Reporting Lab (the Lab) published a Report on the development of climate-related corporate reporting (Report). The report follows the Lab’s previous reports on business models, risk and viability reporting (published in October 2018) and performance metrics (published in November 2018) and considers how the principles established in these reports could be applied in the context of climate-related reporting. It has been developed to assist companies by providing practical guidance on how to meet investor expectations.

The Report notes that although disclosure is developing, as investor approaches become more sophisticated, more effective and comprehensive reporting will be necessary. It recommends that companies should apply the principles in the Task Force on Climate-related Financial Disclosures (TCFD) framework when thinking about and reporting on climate change. As many companies reported that the TCFD helped them align their thinking and discussions and provided a clearer route to reporting, the report is structured around the four TCFD core elements: governance, strategy, risk management and metrics and targets, rather than establishing a separate framework. In order to help companies apply these principles, the Lab has also developed a series of questions they should ask themselves.

The Report is divided into five sections:

• Section one - contains investor and company views on the four TCFD core elements and lists a set of questions companies should ask themselves in relation to each, to help develop their reporting.
• Section two - brings together the questions for companies and disclosure recommendations across the TCFD core elements to allow for easier consideration.
• Section three - provides examples of developing reporting practice. These extracts illustrate how companies are trying to meet the reporting challenge.
• Section four - sets out a list of those companies and investors that participated in the project.
• Section five - covers the main regulatory and market initiatives relevant to companies’ disclosure on climate change, and some broader input on investor requirements and activity

(FRC Reporting Lab: Climate-related corporate reporting - Where to next?, 21.10.19)

FCA: FS19/6 - Climate change and green finance next steps: Feedback to DP18/8

On October 16, 2019 the Financial Conduct Authority (FCA) published Feedback Statement 19/6 (FS19/6) in response to its Discussion Paper (DP18/8) published in October 2018, which sought views on potential FCA action on climate change and green finance. In the light of responses to DP18/8, FS19/6 identifies a number of priorities that will provide a foundation for the FCA’s future work on climate change and green finance.

FS19/6 sets out the feedback and the FCA’s evolving approach following DP18/8 and highlights why climate change is an important issue for the FCA, the financial services sector, and for the users of financial services.

In addition, FS19/6 sets out the FCA’s next steps in this area, including

• Plans to publish a consultation paper in early 2020 proposing new disclosure rules for certain issuers aligned with the recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures on a 'comply or explain' basis and clarifying existing disclosure obligations relating to climate change risks.
• Considering how best to enhance climate-related disclosures by regulated financial services firms that fall outside the scope of its proposed new rules for certain listed issuers.
• Continuing to consider whether issuer disclosures on other sustainability factors, beyond climate change, are adequate to support investors’ business, risk and investment decisions.
• Taking some additional steps on the integration of climate change and other environmental, social and governance (ESG) risks in relation to workplace personal pension schemes.
• Publishing a Feedback Statement in the coming weeks in response to a joint Discussion Paper with the Financial Reporting Council on stewardship and finalising proposed rule changes requiring Independent Governance Committees to oversee and report on firms’ ESG and stewardship policies.
• Challenging firms where the FCA sees potential “greenwashing”, clarifying its expectations and taking appropriate action to prevent consumers being misled.
• Engaging with, and contributing to, collaborative initiatives on the topic, including the EU’s Sustainable Finance Action Plan and the Climate Financial Risk Forum.

(FS19/6 Climate Change and Green Finance: summary of responses and next steps - Feedback to DP18/8, 16.10.19)
(FCA today announces future work on climate change and green finance – press release, 16.10.19)

International Corporate Governance Network: Consultation on Global Stewardship Principles published

On October 11, 2019 the International Corporate Governance Network (ICGN) published a consultation outlining proposed amendments to its Global Stewardship Principles (Principles), which were originally published in 2016. The Principles serve as a resource to support the development of stewardship codes in many markets around the world and set out ICGN’s view of current best practices in relation to investor stewardship obligations, policies and processes.

The ICGN still considers the Principles robust and fit for purpose, but intends to identify possible changes or improvements to keep the Principles fresh and relevant for ICGN members and others.

Among the various changes to the Principles, some of the key features include:

• Greater emphasis on fiduciary duty, culture and values by institutional investors
• More focus on systemic risks relevant to institutional investors
• Capital allocation as a topic for engagement for both creditors and shareholders
• Protecting voting rights - against dual class shares and other forms of differential ownership
• Stewardship reporting - focus on stewardship outcomes versus inputs
• Use of environmental, social and governance factors in investment decision-making, as well as stewardship.

Responses to the consultation are requested by November 22, 2019. Consultation responses will inform the revised draft of the Principles that ICGN intends to submit for member approval at the next ICGN Annual General Meeting on June 9, 2020.

(ICGN Member Consultation - Revisions to ICGN Global Stewardship Principles, 11.10.19)

HM Treasury: The Cross-Border Distribution of Funds, Proxy Advisors, Prospectus and Gibraltar (Amendment) (EU Exit) Regulations 2019

On October 23, 2019 the Cross-Border Distribution of Funds, Proxy Advisors, Prospectus and Gibraltar (Amendment) (EU Exit) Regulations 2019 (Regulations) were published. The Regulations were made on October 22, 2019 and aim to address deficiencies in retained European Union (EU) law so that the UK’s regulatory regime for financial services will continue to operate effectively from the point at which the UK leaves the EU.

The Regulations make several changes, including the following:

• The Proxy Advisors (Shareholders’ Rights) Regulations 2019 (SI 2019/926) (Proxy Advisors Regulations) - to provide that the Proxy Advisors Regulations will after exit day apply only to proxy advisors that provide services to a shareholder that has shares in a company registered in the UK or Gibraltar, and that is trading on a UK or Gibraltarian regulated market, and, if the advisors have their registered office in the UK, or provide services through a UK establishment.
• The Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/707) (the Official Listing Regulations), and the Prospectus Regulation - to ensure that, among other matters, the exemptions from producing a prospectus continue to operate after exit.
• The Packaged Retail and Insurance based Investment Products (Amendment) (EU Exit) Regulations 2019 (SI 2019/403) (PRIIPS Regulations)– to extend the exemption, until December 31, 2021, from the requirement for UCITS funds to create a ‘key investor document’ (KID). This exemption will mean that UCITS marketed in the UK will not have to produce a KID until December 31, 2021, allowing the European Commission to review whether the requirement to produce a KID is appropriate for UCITS funds, and whether the requirement should be adjusted or removed.
• The Cross-Border Distribution of Collective Investment Undertakings Regulation (EU) No. 2019/1156 (CBDF Regulation) - to be revoked (as after exit, the UK will fall outside the EU’s single market for financial services).
• The Gibraltar (Miscellaneous Amendments) (EU Exit) Regulations 2019 (SI 2019/608) - to ensure that the CBDF Regulation remains in force for Gibraltarian-based financial services firms and funds, with a view to maintaining the pre-exit relationship between the UK and Gibraltar on financial services.

Most of the Regulations will come into force immediately before exit day, save for three that will enter into force on exit day.

(HM Treasury: The Cross-Border Distribution of Funds, Proxy Advisors, Prospectus and Gibraltar (Amendment) (EU Exit) Regulations 2019, 22.10.19)
(HM Treasury: The Cross-Border Distribution of Funds, Proxy Advisors, Prospectus and Gibraltar (Amendment) (EU Exit) Regulations 2019 explanatory memorandum, 22.10.19)

European Parliament: Corrigendum to position on SME growth market reform regulation

On October 3, 2019 the European Parliament approved a corrigendum with regard to the adoption of the proposal for a regulation to amend the Markets in Financial Instruments Directive II, the Market Abuse Regulation and the Prospectus Regulation in relation to the promotion of the use of SME growth markets. It had resolved to adopt, with amendments, the European Commission's proposal for the regulation on April 18, 2019. The corrigendum makes minor amendments to the text.

(Corrigendum to the position of the European Parliament adopted at first reading on 18 April 2019, 03.10.19)