United Kingdom | Publication | April 2022
On March 25, 2022 the Financial Conduct Authority (FCA) published a Consultation Paper, CP 22/5, which proposes changes to allow companies to use a more up to date electronic format for their annual financial reports. The consultation applies to issuers in scope of DTR 4.1.
Under the FCA’s transparency rules, from January 1, 2022, certain companies on UK regulated markets with financial years starting on or after January 1, 2021 must report their end of year annual financial statements in a machine-readable and ‘tagged’ electronic format. This is aimed at making information in annual financial reports easier to extract and compare for investors, research analysts and other market participants. Issuers who are in scope of DTR 4.1 must prepare their annual financial report in the electronic reporting format required by DTR 4.1.14R. This is set out in a supporting Technical Standard (derived from onshored EU legislation and referred to in DTR 4.1.14R as the ‘TD ESEF Regulation’) and the rule changes were finalised in December 2021.
Following these changes, the FCA currently allow issuers to use, among other permitted taxonomies, the UKSEF 2022 taxonomy issued by the Financial Reporting Council (FRC) on October 8, 2021 (v1.0.0) to mark up their annual financial statements within the annual financial report. The FRC has issued a replacement version of the taxonomy in its 2022 taxonomy suite (v.2.0.0 ), which reflects updated standards following recently adopted EU legislation on the European Single Electronic Format (ESEF). The later version reflects changes in International Financial Reporting Standards (IFRS) for tagging the notes to the financial statements (which issuers can choose to apply before they become mandatory next year) and a number of general taxonomy improvements such as clearer labels and new common practice tags.
The FCA’s current rules do not reference this new version but the FCA’s website was updated to inform issuers and software vendors that this new version had been published. The FCA explained their intention to switch their National Storage Mechanism (NSM) over to accepting filings in UKSEF 2022 v2.0.0 in place of UKSEF 2022 v1.0.0 at the end of April 2022 and said they would consult on updating their rules. For technical reasons, the FCA cannot accept both versions in parallel.
The FCA now propose to change the definition of UKSEF 2022 in the range of permitted taxonomies in Article 2(4B) of the TD ESEF Regulation so that it refers to UKSEF 2022 v2.0.0 instead of v1.0.0, with this change to take effect from Tuesday May 3, 2022. Since the FCA cannot accept both versions into the NSM at the same time, the last business day the FCA would accept filings using UKSEF 2022 v1.0.0 would be Friday April 29, 2022. At the same time, the new ESEF 2021 taxonomy (which the FCA consulted on in September 2021 before it had formally entered into force in the EU) will also be added as a permitted taxonomy in the FCA’s rules, subject to the FCA Board shortly approving a further amendment to the TD ESEF Regulation.
The FCA hope that, by making clear in advance their intention to switch over from UKSEF 2022 v.1.0.0 to v.2.0.0 at the start of May 2022, disruption and any related costs to issuers who are required to tag their annual financial statements and are currently preparing these or will need to do so in the near future to meet the FCA’s rules will be minimised.
Comments are requested by April 8, 2022, with it being proposed that the change would take effect from Tuesday May 3, 2022.
In March 2022, PIRC published their latest shareholder voting guidelines, setting out their views on issues such as board structure, remuneration policy and management of social and environmental issues.
Key changes from their 2021 guidelines include the following:
PIRC will be looking for companies to discuss diversity and particularly to acknowledge the targets in the Parker Report. Starting from meetings for the approval of accounts for the financial year 2021, PIRC will recommend opposition on the re-election of the nomination committee chair in a FTSE 100 company (or the chair of the board in the absence of the former) for failing to meet the applicable targets from the Parker Report. Abstention will be recommended on the re-election of the nomination committee chair in a FTSE 250 company (or the chair of the board in the absence of the former) for lack of disclosure on progress in line with the Parker Report, which recommends boards have at least one director representing an ethnic minority by 2024.
PIRC has added to its requirements on disclosure of skills on the board. The chair is also expected to act as the lead for the board's supervisory work and in assuring the company's strategy and implementation are ‘Paris-aligned’ or alternatively, explain the reason if they are not. PIRC states that alignment with the Paris Agreement, and where relevant the ‘Glasgow pact’, should be considered in all board decisions, as a framework to allocate capital in a way to manage risks and find opportunities in accordance with credible transition plans and targets to achieve net-zero. Failure to do so may expose the company to significant financial risks, including inability to access capital at accessible cost. As such, PIRC will recommend opposition on the re-election of the chair in this case.
In light of PIRC’s views above, directors from extractive companies will be expected to state whether the company’s financial statements or the accounts are Paris-aligned, or explain the reason if they are not. PIRC state that shareholders should not support accounts that do not reflect accurately all financial impact from material risks, which could prevent the company from continuing as a going concern in the long term, and PIRC will recommend opposition to the accounts in this case.
PIRC will expect auditors at extractive companies to state whether the financial statements or the accounts are Paris-aligned, or explain the reason if they are not. PIRC believe that auditors should be held accountable for not disclosing to shareholders such issues in the auditing of the accounts of the company, and PIRC will recommend opposition to the re-election of auditors, in the event of these not issuing a statement on the alignment of accounts with the Paris agreement.
PIRC has added to the circumstances when it will not support bonuses for executive directors and these will include where there have been substantial redundancies due to the crisis.
Due to the impact of management fees, the interests of the fund manager are considered to be in conflict with those of shareholders and the company. As such, PIRC will not consider safeguards put in place as a sufficient guarantee for shareholders and will recommend opposition to receipt of the annual report where the fund manager is also providing company secretarial services.
PIRC consider it essential for understanding the resilience of companies’ business strategies that they set out a climate scenario (distinct from an overall environmental policy) that deals with keeping warming within a 1.5-degree Celsius scenario stating clearly the science–based policies and targets, in line with the Paris agreement and the Glasgow Climate Pact.
PIRC look to assess whether companies provide climate resilience scenario planning to a 1.5-degree target; whether the chair of the board is responsible for oversight of sustainability strategy, including on climate; and whether there is at least one member of the board or senior management with significant climate-related experience within the company’s sector. PIRC believe it is essential that boards can understand what ‘greenwash’ is, see through it where it occurs and understand the impact for the company and shareholders deriving from the climate commitments they oversee. PIRC state that Net zero should not be not the goal. In most cases the goal should be zero-carbon.
PIRC comment on the 2021 AGM season when there were a number of ‘say on-climate’ resolutions, either submitted by the board or filed by shareholders. PIRC state that while climate investing has gained momentum, in many cases, transition plans put to the vote did not seem to illustrate that these companies were leaders in decarbonisation strategies ‘and rarely identified credible actions for implementing realistic short- and medium-term targets for aligning with a 1.5 degree scenario.’
From 2022, PIRC, will expect governance of climate to be fully embedded in the company’s risk management, around three key pillars across Policy, Disclosure and Governance.
For example, in relation to Policy, transition plans should be disclosed early (ideally by year-end prior to the AGM) and clearly link the company’s risk management and implementation with financial impact from climate risk and mitigation policies.
In relation to Disclosure, among other things, there should be a clear review of climate lobbying both directly and within third-party trade bodies and associations and companies should proactively report to shareholders and stakeholders on their role in disseminating science-based information and behaviours positively impacting a just transition.
In relation to Governance, there should be a clear and significant link between companies’ leadership of climate governance and how it is implemented across the organisation. Performance related rewards should not be paid out unless it is clear the company is aligned with the Paris Climate Agreement.
The PIRC Shareholder Voting Guidelines can be purchased from PIRC.
On March 31, 2022 the International Sustainability Standards Board (ISSB), established at COP26 to develop a comprehensive global baseline of sustainability disclosures for the capital markets, launched a consultation on its first two proposed standards. One sets out general sustainability-related disclosure requirements and the other specifies climate-related disclosure requirements.
The proposals, in the form of exposure drafts, build upon the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and incorporate industry-based disclosure requirements derived from SASB Standards. They been developed in response to requests from G20 leaders, the International Organization of Securities Commissions (IOSCO) and others for enhanced information from companies on sustainability-related risks and opportunities. The proposals set out requirements for the disclosure of material information about a company’s significant sustainability-related risks and opportunities that is necessary for investors to assess a company’s enterprise value.
Proposals in [Draft] IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information would require an entity to disclose material information about all of the significant sustainability-related risks and opportunities to which it is exposed. The proposals include requirements and guidance to support the disclosure of material information about significant sustainability-related risks and opportunities not specifically addressed by an IFRS Sustainability Disclosure Standard.
[Draft] IFRS S2 Climate-related Disclosures sets out requirements for identifying, measuring and disclosing climate-related risks and opportunities, so that entities are required to provide information about their exposure to climate-related risks and opportunities.
The ISSB is working closely with other international organisations and jurisdictions to support the inclusion of the global baseline into jurisdictional requirements. Comments are requested by July 29, 2022 and the ISSB will then review feedback on the proposals in the second half of 2022, with the aim of issuing the new Standards by the end of 2022, subject to the feedback.
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