Essential Corporate News – Week ending March 31, 2023

PLSA: Stewardship and Voting Guidelines 2023

On March 30, 2023 the Pensions and Lifetime Savings Association (PLSA) published their updated Stewardship and Voting Guidelines. 

Key changes from their Voting Guidelines published in 2022 include the following:

• Virtual company meetings – While the PLSA recognises the use of virtual meetings in exceptional circumstances, such as when government restrictions on movement are in place, in other cases it believes that meetings should allow for in person attendance and should not be held on a ‘virtual only’ basis. Since the PLSA believes that this fundamentally erodes the ability of shareholders to hold boards to account, it would not support this as a permanent arrangement.
• Composition and diversity of boards – The PLSA notes that although there is evidence of progress on UK boards regarding gender and ethnic diversity, more work remains to be done. It refers to the latest statistics published in 2023 by the FTSE Women Leaders Review and the Parker Review Committee on gender and ethnic diversity, as well as the new Listing Rule requirements in this area, and states that a characteristic of good company behaviour is a consistency in a company’s strategy towards, and explanations of the contribution of, diversity and its link to corporate value over time, as well as documentation on the diversity of its board. Disclosure regarding the diversity of the board on a “comply or explain basis,” including a clearly defined process for developing board diversity is seen as best practice. Investors are advised to consider voting against the Chair or Chair of the Nomination Committee if the company is failing to meet diversity targets, and in assessing the suitability of a new Chair, the current balance and diversity of the board should be considered. 
• Executive remuneration - The PLSA calls on companies to exercise restraint in executive pay, especially during the cost-of-living crisis, and believes there is growing demand for alignment between remuneration and wider sustainability targets. The PLSA now expects to see this reflected in voting policies. The Voting Guidelines recommend that remuneration structures and incentives for executive directors should cascade down to all employees in order to allow employees to share in the success of the business.
• Climate-change resolutions - For say on climate and other shareholder voting resolutions, the Voting Guidelines state that investors should consider whether the plans put forward for approval are underpinned by credible targets. Ideally plans should reflect established industry frameworks and be in keeping with the UK Transition Plan Taskforce (TPT) guidance. Good company behaviour includes credible transition plans that set out clear interim targets and milestones, material actions, activities and accountability mechanisms. It also involves companies taking into consideration social factors in all of their activities, including the products and services they offer. 
• Workforce – This is a new section in the Voting Guidelines with the PLSA noting that since a company’s workforce is one of the main contributors to its long-term success, clear and significant reporting about the workforce is in the best interest of organisations. Investors are advised to look at Annual Reports for information about physical health, safety and wellbeing initiatives, alongside examples of practices to mitigate risks in this area, as well as information about human rights and modern slavery and workforce diversity and inclusion. Emerging areas of interest for companies are stated to be mental health and menopause and investors are encouraged to start by engaging in these topics and promoting best practices which companies should follow. The Voting Guidelines set out what good company behaviour looks like in all these areas and sets out circumstances where they should consider voting against the Annual Report (for example, where FTSE 100 companies do not have a formal approach to workplace wellbeing disclosure, including mental health management and disclosure) or the reappointment of the responsible director (for example, where a company identified as highly exposed to modern slavery risks, or where there has been confirmed incident, fails to demonstrate an adequate risk management and a willingness to change its approach).

(PLSA, Stewardship and Voting Guidelines 2023, 30.03.2023) 

Department for Energy: Mobilising Green Investment – 2023 Green Finance Strategy

On March 30, 2023 the UK Government published an update to its 2019 Green Finance Strategy, setting out its framework for the UK to become the world’s first Net Zero Aligned Financial Centre. 

Proposed actions include the following:

• Transition plans - The Strategy paper notes that the Financial Conduct Authority (FCA) requires listed companies, as well as large asset owners and managers to disclose transition plans on a ‘comply or explain’ basis. Later in 2023, when the Transition Plan Taskforce (TPT) has finalised its best practice framework for transition plans, the Government will consult on the introduction of requirements for the UK’s largest companies to disclose their transition plans if they have them. To ensure parity between listed and private companies, as well as to ensure requirements are consistent and comparable across the economy, the Government expects to consult on the basis that these requirements could align closely with those of the FCA, including the ‘comply or explain’ basis. 
• ISSB - The Government will continue to support the work of the International Financial Reporting Standards (IFRS) Foundation’s new standard-setting board – the International Sustainability Standards Board (ISSB) – and will set up a framework to assess these standards for their suitability for adoption in the UK as soon as the final standards are published (expected summer 2023).
• Green Taxonomy - There will be a consultation on the Green Taxonomy in autumn 2023. The Government proposes that nuclear will be included within the UK’s Green Taxonomy, subject to consultation. After the Taxonomy has been finalised, the Government will initially expect companies to report voluntarily against it for a period of at least two reporting years after which it will explore mandating disclosures. Government does not wish to place undue burdens onto companies whose size or scale but will develop proposals with proportionality in mind.
• Investor stewardship - To achieve effective investor stewardship, the Government will work with the FCA, Financial Reporting Council and the Pensions Regulator to review the regulatory framework for the effective stewardship that is crucial to climate and environmental oversight, including the operation of the UK Stewardship Code.
• Taskforce for Nature-Related Financial Disclosures (TNFD) - The Government is committed to supporting the TNFD, believing its framework will enable investors to make more nature-positive capital allocation decisions. It will be designed to be used by businesses and financial institutions of different sizes, across sectors and jurisdictions, in a manner that can inform the global baseline on nature related reporting. The Government will explore how best the final TNFD framework, due to be published in September 2023, should be incorporated into UK policy and legislative architecture.

(Department for Energy: Mobilising Green Investment – 2023 Green Finance Strategy, 30.03.2023)

HM Treasury and FCA: Joint Statement on the criminal market abuse regime

On March 24, 2023 HM Treasury and the Financial Conduct Authority (FCA) issued a joint statement following completion of their joint review of the criminal market abuse regime (the Criminal Regime Review). They both committed to the Criminal Regime Review in the Economic Crime Plan 2019-2022 published in July 2019. It has taken place within the wider context of regulatory reforms in financial services, the Future Regulatory Framework (FRF) Review, established to determine how the financial services regulatory framework should adapt to the UK’s new position outside the European Union and how to ensure the framework is fit for the future. 

The joint statement points out that the Criminal Regime Review has identified a number of areas where the government believes it would be appropriate to update the criminal market abuse regime, noting that it has already accepted recommendations of the Fair and Effective Markets Review (FEMR) in relation to market abuse, where the government will lay secondary legislation in 2023.

As part of the FRF programme, the Government intends to repeal the retained UK Market Abuse Regulation (UK MAR), the civil market abuse regime, and replace it with UK-specific legislation. A timetable for this will be set out in due course.

The joint statement comments that the government will consider changes to the criminal market abuse regime alongside any reforms to UK MAR through the FRF Review and will therefore consider how to take forward the recommendations from the Criminal Regime Review at that point.

(HM Treasury and FCA, Joint statement on the criminal market abuse regime, 24.03.2023)

FRC: 3-Year Plan 2023-2026

On March 27, 2023 the Financial Reporting Council (FRC) published its latest 3-Year Plan outlining its priorities and objectives for the period 2023-2026. 

One section of the 3-Year Plan focuses on the transition from the FRC to the Audit, Reporting and Governance Authority (ARGA). The FRC’s 2022-25 Plan was based on the planning assumption that ARGA would be created via legislation, with a start date of April 2023. However, after that Plan was published, it became clear that the ARGA Bill would not receive Parliamentary time in the third session. The FRC notes that in the continued absence of a firm legislative timetable, it pushed its planning assumption back by one year to April 2024 and although changes to the Parliamentary timetable have now cast some doubt over this date, the FRC has decided to retain the 2024 assumption for the purposes of this Plan, whilst acknowledging the continued uncertainty around timing of legislation. When the timetable becomes clearer, the FRC says that it will communicate any changes in its planning assumptions to its stakeholders.

As a result of this, the FRC has re-prioritised its work, focusing on the changes it can make using its existing powers and remit. As an example, the FRC points out that in November 2022 it issued a consultation on a draft Minimum Standard for Audit Committees. When published in 2023, FTSE 350 audit committees will be able to adopt the standard on a voluntary basis before it becomes mandatory and the FRC starts to supervise it when ARGA is created. The FRC also notes that 2023 will see the first revisions to the UK Corporate Governance Code since 2018. 

(FRC, 3-Year Plan 2023-2026, 27.03.2023)