Essential Corporate News – Week ending September 10, 2021

FRC: Thematic Review - Streamlined Energy and Carbon Reporting

On September 8, 2021 the Financial Reporting Council (FRC) published the findings of its review of reporting on emissions, energy consumption and related matters under the Streamlined Energy and Carbon Reporting (SECR) rules which came into effect from April 1, 2019. The FRC’s review considers how a sample of companies and limited liability partnerships have complied with the new SECR requirements, identifies examples of emerging good practice and outlines its expectations for future reporting.

This review follows the FRC’s Climate Thematic Review published in November 2020. The SECR rules set out certain required statutory disclosures about emissions and energy use. From  April 1, 2019 the rules expanded previous emissions disclosure requirements for quoted companies and required emissions reporting for the first time for large unquoted companies and limited liability partnerships.

In terms of its expectations for good SECR disclosures, points made by the FRC include the following:

• The required information should be disclosed in a form which is clear, understandable and easy to navigate, using cross-references to relevant information in other parts of the annual report.
• An adequate explanation of the methodologies used to calculate emissions and energy use must be provided with decisions about boundaries and emissions included being clearly explained. For example, it should be clear which entities are included in group disclosures and it is noted that best practice is considered to be an alignment of SECR reporting with consolidated financial statements.
• If ratios are provided which cannot be recalculated from, or are apparently inconsistent with, other disclosures in the annual report then an explanation or reconciliation should be provided.
• The extent of any due diligence or assurance over emissions and energy use metrics should be described, with an explanation of the level of assurance given and scope of coverage. Companies are warned not to use terms such as “audited” or “verified” inappropriately in this context. 
• An adequate description of energy efficiency initiatives in the current and comparative period should be provided, focussing on “principal measures” with the most significant impact.
• Companies are referred to these Guidelines and advised to consider whether additional information should be disclosed (such as scope 3 emissions) to help investors and others.
• Clear explanations should be provided which help users understand and compare major commitments such as “net zero emissions” targets or “Paris-aligned strategies”, noting that this may require additional disclosures beyond the minimum SECR requirements.

(FRC, Thematic Review – Streamlined Energy and Carbon Reporting, 08.09.2021)

DWP: Changes to the Pensions Regulator’s mandatory notifications regime – Consultation

Background to consultation

On September 8, 2021 the Department for Work and Pensions (DWP) published a consultation paper relating to the detail of proposed changes to the Pensions Regulator’s “notifiable events” regime.  

“Notifiable events”  are red-flag events which could harm a defined benefit (DB) pension scheme, for example by reducing the support from its sponsoring employer.  The Pensions Regulator wants early sight of these events and pensions legislation already sets out a list of events that employers must tell the Pensions  Regulator about.  To date the early warning system will often only have required notification to be given on signing – too late for the Pensions Regulator or trustees to have a seat at the table.

In the wake of the Bhs and Carillion scandals, the Government decided to strengthen this early warning system by:

• Expanding the list of events that need to be notified to the Pensions Regulator (and trustees),
• Requiring notification at an earlier stage, and
• For the most material corporate transactions, increasing the level of information that needs to be provided. 

The DWP has now published detailed draft regulations setting out these changes. 

What is the significance for companies?

If passed in their current form, companies with DB pension schemes embarking on certain transactions will need to engage with both the Pensions Regulator and the pension scheme trustees more intensively and at a much earlier stage in the transaction process.  It will be important to get this right; from October 1, 2021 the Pensions Regulator will be able to impose penalties of up to £1 million for breaches of the notifiable events regime. 

What are the main changes?

Two new events are being added to the list of notifiable events:

• A “decision in principle” by an employer to sell a material proportion of its business or assets.  This means more than 25 per cent of the gross value of its assets or a business that accounts for more than 25 per cent of the employer’s annual revenue.  This will catch certain group reorganisations, and a series of smaller transactions conducted over a 12-month period will have to be added together to see if the 25 per cent threshold is passed.
• A “decision in principle” by an employer to grant or extend security over its assets (or those of significant subsidiaries) resulting in the secured creditor ranking above the scheme.

An existing notifiable event - where a controlling employer relinquishes control of the employer company – is being amended.

All three of these events will trigger a requirement to provide a written statement to the Pensions Regulator and the trustees explaining the implications of the transaction for the DB pension scheme and how the risks for the scheme will be mitigated.  This statement will have to be provided at the point when “the main terms” of the transaction “have been proposed”.

Should there be material changes to the terms of the transaction or to the mitigation proposed for the scheme, further notifications will be needed.

Comment

The detailed rules raise several questions which it is to be hoped will be resolved at the consultation stage.

The main problem is the lack of clarity on timing for the notifications and later written statements.  It is particularly unclear at what point a “decision in principle” will have been taken to embark on a transaction.

Companies will naturally be concerned about the commercial sensitivity of certain transactions and potentially having to engage with trustees at a time when a deal is uncertain and may fundamentally change.  It is unlikely to be in anyone’s interests for companies to have to make continuous notifications about changing proposals as negotiations progress.  It is also very unclear how these provisions will apply to takeovers.

We do not yet know when these rules will come into force.  The consultation ends on October 27, 2021.

(DWP, Strengthening the Pensions Regulator’s powers, Notifiable Events (Amendments) Regulations 2021, Consultation document, 08.09.2021)
(DWP, Strengthening the Pensions Regulator’s powers, Notifiable Events (Amendments) Regulations 2021, 08.09.2021)

FRC: Successful signatories to UK Stewardship Code listed

On September 6, 2021 the Financial Reporting Council (FRC) published a list of the successful  signatories to the UK Stewardship Code (Code), with links to their Stewardship Reports. Organisations listed are required to report every year to the FRC on their application of the Code. Reports are assessed by the FRC and organisations that meet the reporting expectations are accepted as signatories.

The FRC notes that the successful applicants better demonstrated their commitment to stewardship and it was pleased to see investors better integrating stewardship, and environmental, social and governance (ESG) factors into their investment decision-making, reporting on asset classes other than listed equity and identifying the outcomes of their efforts. There was also some strong reporting on underpinning governance activities.

The FRC comments that organisations that did not make the list commonly did not address all the Principles in the Code or sufficiently evidence their approach, instead relying too heavily on policy statements. Other areas of weakness included reporting on the approaches to review and assurance, and monitoring service providers. The FRC would also like to see more focus on identifying areas for improvement. Unsuccessful organisations can reapply in future application windows.

(FRC, FRC lists successful signatories to the UK Stewardship Code, 06.09.2021)

FCA: Quarterly Consultation No.33 – CP21/27

On September 3, 2021 the Financial Conduct Authority (FCA) published a Consultation Paper which includes proposals to make consequential changes to the Prospectus Regulation Rules and Listing Rules to align with changes to prospectus regime guidance and to amend the rules on corporate reporting in machine-readable electronic format under DTR 4.

Changes to the Prospectus Regulation Rules and Listing Rules to align with changes to prospectus regime guidance

In the FCA’s Primary Markets Bulletin 34 (PMB 34) and its associated Guidance Consultation (GC21/1), the FCA consulted on changes to their Knowledge Base in relation to the prospectus regime. PMB 34 set out the FCA’s intention:

• To adapt, as FCA guidance, the European Securities and Market Authority’s (ESMA) Guidelines on disclosure requirements under the Prospectus Regulation; 
• To augment those guidelines with the measures on specialist issuers in the ESMA update of the Committee of European Securities Regulators (CESR) recommendations (CESR Recommendations) in the FCA’s Handbook; and
• To incorporate into technical notes (TNs) certain explanations from the Questions and Answers, Prospectuses (PD Q&As) in the FCA’s Handbook.

The FCA is now consulting in this Quarterly Consultation Paper, on removing the CESR Recommendations and the PD Q&As from the FCA Handbook and  making consequential amendments to the Prospectus Regulation Rules (PRR) sourcebook and the Listing Rules. 

Amendments to rules on corporate reporting in machine-readable electronic format under DTR 4

DTR 4.1.14R and the TD ESEF Regulation (the UK version of Commission Delegated Regulation (EU) 2019/815 of 17 December 2018) require issuers to prepare annual financial reports in a machine-readable electronic format. The only taxonomy that currently permitted is the ‘core taxonomy’ in Annex VI of the TD ESEF Regulation.

The FCA is now proposing to amend Article 4(4) of the TD ESEF Regulation to permit issuers to use the following taxonomies for financial years beginning on or between  January 1 and  December 31,  2021: 

• The core taxonomy in Annex VI of the TD ESEF Regulation; 
• The versions of the ESEF taxonomy that reflect either the IFRS Foundation’s 2020 taxonomy updates (ESEF 2020) or the 2021 taxonomy updates (ESEF 2021); 
• The version of the UKSEF taxonomy issued by the FRC in its ‘2021 suite’ (UKSEF 2021 suite), or the version that will be formally issued later this year in the ‘2022 suite’ (UKSEF 2022 suite). 

This flexibility is intended to allow issuers to select the taxonomy that is most suited to their circumstances, while still achieving the FCA’s policy intent of requiring machine-readable financial reporting which will facilitate analysis. The FCA plans to consult in 2022 on a longer-term approach which allows for annual updates to approved taxonomies.

There is a five week consultation period in relation to these proposals.

(FCA, FCA: Quarterly Consultation No.33 – CP21/27, 03.09.2021)

FRC: UK electronic reporting: survey results and resources for companies

On September 9, 2021 the Financial Reporting Lab (Lab) published the results of a survey that it released in  May 2021, that asked companies and service providers to comment on their preparations for the introduction of structured electronic reporting for annual financial reports (DTR 4.1.14) as part of the UK implementation of a wider cross-EU initiative (ESEF).

The results of the survey  show that UK companies have begun to put the right steps in place to meet the requirements, but still have some important outstanding actions. For example. many have undertaken an analysis of the requirements and identified service providers but key remaining actions are to run a test and engage the board.

Other points arising from the survey include the following:

• Almost all companies are treating the ESEF file as an addition to the traditional annual report. 
• Most participants were awaiting guidance on 2021 taxonomies before selecting an approach to the taxonomy to be used for 2021 reporting. A number considered that they would use the UKSEF taxonomy (which is a UK mirror of the ESEF EU taxonomy with additional UK specific tags).
• Taskforce on Climate-related Financial Disclosure (TCFD) reporting and environmental, social and governance disclosures are key areas identified by preparers as priorities for future tagging.

The Lab has also published a list of resources to help companies understand and implement the requirements.

The Lab is reviewing a set of UK and EU ESEF filings, with the aim of publishing a best practice report in October 2021.

(FRC, UK electronic reporting: survey results and resources for companies, 09.09.2021)

Insolvency Service: End of temporary insolvency measures

On September 9, 2021 the Insolvency Service issued a press release announcing that temporary insolvency restrictions protections are being lifted and new targeted measures to support small business and commercial tenants introduced.

At the same time as temporary measures brought in to support businesses from insolvency during the pandemic will be phased out from October 1, 2021, new measures are to be brought in to help smaller companies get back on their feet to give them more time to trade their way back to financial health before creditors can take action to wind them up.

The new legislation will:

• Protect businesses from creditors insisting on repayment of relatively small debts by temporarily raising the current debt threshold for a winding up petition to £10,000 or more.
• Require creditors to seek proposals for payment from a debtor business, giving them 21 days for a response before they can proceed with winding up action.
  These measures will be in force until March 31, 2022.

The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) Regulations 2021 and Insolvency (England and Wales) (No.2) (Amendment) Rules 2021 were made on September 8, 2021, with both instruments laid before Parliament on September 9, 2021.

(Insolvency Service,  End of temporary insolvency measures, 09.09.32021)