UK corporate governance and narrative reporting: Key developments checklist

Introduction

This checklist is intended to help UK-listed companies keep abreast of key developments in the fast-moving areas of corporate governance and narrative reporting.

It sets out our thoughts on some of the main areas of change during the last few months, as well as a list of key developments by area, including links to more detailed summaries of those developments.

Key themes

A notable development in the period covered by this checklist is the extension of the current climate-related financial disclosure requirements that apply to premium listed issuers, to issuers of standard listed shares and Global Depositary Receipts representing equity shares. These apply to such issuers for financial years commencing on or after January 1, 2022. Similar requirements are also being extended to large unlisted UK companies and limited liability partnerships (LLPs) for financial years commencing on or after April 6, 2022. To help companies meet these new reporting requirements, bodies such as the Financial Reporting Council’s Financial Reporting Lab and the London Stock Exchange Group have published guidance which is referred to in this checklist.

In light of the requirement under DTR 4.1.14R for companies admitted to trading on UK regulated markets to start producing their annual financial reports in a structured electronic format for financial years starting on or after January 1, 2021, a number of publications have been issued to assist such companies with this. The Financial Conduct Authority introduced this requirement as part of the UK implementation of a cross-EU initiative known as the ‘European Single Electronic Format’ or ‘ESEF’. The relevant publications are set out in this checklist.

Audit

FRC: Audit Committee Chairs’ views on, and approach to, audit quality (January 2022): The FRC has published the results of independent research it commissioned (which builds on similar research in 2020) and which the FRC states reinforces the case for developing standards for Audit Committees to help promote a more consistent approach to audit quality. The research, conducted by YouGov, was based on in-depth interviews with Audit Committee Chairs (ACCs) discussing how they carry out their role. ACCs interviewed included some from FTSE 100, FTSE 250, and smaller listed entities. Further details are here.

FRC: Developments in Audit 2021 (November 2021): The Financial Reporting Council (FRC) has published its latest edition of ‘Developments in Audit’, which sets out the FRC’s annual assessment of UK audit and ongoing expectations for how audit firms should deliver audit quality improvements to deliver a more effective audit market in the public interest. Further details are here.

FRC: Proposed revisions to the Audit Firm Governance Code – Consultation (September 2021): The FRC has published a consultation document which sets out proposals to update and strengthen the Audit Firm Governance Code (Code) in support of the FRC’s objectives to promote high-quality audit and audit market resilience. The Code, first published in 2010 to improve the governance in place at the largest audit firms (and last updated in 2016), applies to the “Big Four” audit firms and to other firms auditing FTSE 350 companies. Going forward it will also apply to firms that audit significant numbers of other types of public interest entities. Further details are here.

Climate change

FCA: Enhancing climate-related disclosures by standard listed issuers – PS21/23 (December 2021): The Financial Conduct Authority (FCA) has published Policy Statement PS21/23 confirming the extension of the application of the Listing Rule climate-related financial disclosure requirements to issuers of standard listed shares and Global Depositary Receipts (GDRs) representing equity shares (excluding standard-listed investment entities and shell companies). PS21/23 summarises the feedback to the FCA’s consultation on this (CP21/18 published in June 2021) and confirms the final rule and guidance. It also sets out the FCA’s future intended direction of travel as standards for corporate reporting on climate and sustainability matters evolve. Further details are here.

FCA: Primary Market Bulletin No. 36 (November 2021): The Financial Conduct Authority (FCA) has published a special edition of its Primary Market Bulletin (PMB) to introduce specific Task Force on Climate-related Financial Disclosures (TCFD) aligned climate-related disclosure requirements for listed companies and set out the FCA’s disclosure expectations and supervisory strategy. Further details are here.

IFRS: IFRS Foundation announces International Sustainability Standards Board, consolidation with CDSB and VRF, and publication of prototype disclosure (November 2021): The IFRS Foundation Trustees have announced three developments to provide the global financial markets with high-quality disclosures on climate and other sustainability issues. Further details are here.

BEIS: Consultation response - Mandatory climate-related financial disclosures by publicly quoted companies, large private companies, and LLPs (October 2021): The Department for Business, Energy and Industrial Strategy (BEIS) has announced that the UK will become the first G20 country to enshrine in law mandatory TCFD - aligned requirements for its largest companies and financial institutions to report on climate-related risks and opportunities. From April 6, 2022, many of the largest UK-registered companies and financial institutions, including many of the UK’s largest traded companies, banks and insurers, as well as private companies and limited liability partnerships with over 500 employees and £500 million in turnover, will have to disclose climate-related financial information on a mandatory basis. Further details are here. The necessary regulations introducing such requirements for both relevant companies and limited liability partnerships, the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022, were published in January 2022. Further details are here and here.

FRC: Taskforce on Climate-related Financial Disclosures (TCFD) - ahead of mandatory reporting: Developing practice (October 2021): In 2021, premium listed companies need to report against the TCFD recommendations on a comply or explain basis in their annual reports for the first time. The FRC’s Financial Reporting Lab has published a report to help companies prepare for mandatory TCFD reporting. It includes practical advice and examples that better address aspects of TCFD reporting from those companies already adopting the framework on a voluntary basis. Alongside the report, the Lab has also published a snapshot of the status of current reporting against the TCFD framework in the UK which highlights the increased uptake in the last year. Further details are here.

FCA: Joint statement by the FCA, PRA, TPR and FRC on the publication of Climate Change Adaptation Reports (October 2021): The FCA, Prudential Regulation Authority (PRA), the Pensions Regulator (TPR) and the FRC have published a Joint Statement in relation to the Climate Change Adaptation Reports they are required to publish under the Climate Change Act 2008. The FCA, PRA and TPR have published their reports which set out how climate change affects their respective responsibilities and the actions they, and the financial sector, are taking in response to it. Further details are here.

LSEG: Understanding climate risk and opportunity – Your guide to climate reporting (October 2021): The London Stock Exchange Group (LSEG) has published a guide to climate reporting setting out guidance for London-listed companies on the integration of climate reporting best practice and implementation of the TCFD recommendations. Further details are here.

HM Treasury: Greening Finance – A Roadmap to Sustainable Investing (October 2021): The UK Government has published ‘Greening Finance: A Roadmap to Sustainable Investing’. This builds on its Green Finance Strategy published in 2019, and it sets out the Government’s long-term ambition to green the financial system and align it with the UK’s net-zero commitment. Further details are here.

Corporate governance

FRC: Creating positive culture – Opportunities and challenges (December 2021): The FRC has published a report which aims to promote good practice and positive working culture in companies, bringing together a wide range of views from board directors, leaders, senior individuals from across different functions and workforce representatives. It is a follow up on the FRC’s Corporate Culture and the Role of Boards report (2016 Report). Further details are here.

QCA: AIM Good Governance Review 2021/22 (December 2021): The Quoted Companies Alliance (QCA) and Hacker Young have published their annual review which outlines the key trends of small and mid-sized quoted companies’ corporate governance performance, tracking progress and informing areas for future focus. Further details are here.

FRC: Annual Review of Corporate Governance reporting (November 2021): The FRC has published its Annual Review of Corporate Governance Reporting. The review highlights areas of high-quality reporting, but notes that there is still room for further improvement in areas such as substantive disclosures on board appointments, succession planning, diversity and reporting on the effectiveness of internal control and risk management systems. In addition, greater clarity as to how a company is applying the principles in the 2018 UK Corporate Governance Code (Code) is needed, as well as clearer explanations where there are departures from the Code so that shareholders and stakeholders have greater confidence of the quality of governance. Further details are here.

Corporate reporting format

FCA: Handbook Notice No 94 (December 2021): The FCA has published its latest Handbook Notice summarising changes to the FCA Handbook and other material made by the FCA Board under its legislative and other statutory powers on November 25 and December 16, 2021. This includes feedback on proposals set out by the FCA in CP21/27 published in September 2021 concerning amendments to the FCA’s rules on corporate reporting in machine-readable electronic format under DTR 4 (see further below). Further details are here.

FCA: Primary Market Bulletin 37 (December 2021): The Financial Conduct Authority has published Primary Market Bulletin 37 (PMB 37) which concerns, among other things, the implementation of the FCA’s postponed rules requiring issuers to publish their annual financial reports (AFRs) in a structured format. Further details are here.

FRC: FRC and FCA Joint Letter to CEOs on structured reporting for issuers with transferable securities admitted to trading on a UK regulated market (November 2021): The FCA and the FRC have sent a joint letter to CEOs of issuers in scope of the requirements in the FCA’s Disclosure Guidance and Transparency Rules (DTRs) for certain companies to start producing their 2021 annual financial reports in a structured electronic format. Further details are here.

FRC: Lab Report on Structured Reporting – Applying DTR 4.1.14 and ESEF (October 2021): The FRC’s Financial Reporting Lab has published a report following its review of 50 early annual financial reports produced in a structured electronic format (structured report) from across the UK and Europe. These reports were either voluntary filings or originated from EU countries where the requirements for structured reports have already come into force. The report sets out the findings of the Lab’s review and highlights some key considerations for companies. Further details are here.

FRC: UK electronic reporting: survey results and resources for companies (September 2021): The FRC’s Financial Reporting Lab (Lab) has 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). Further details are here.

FCA: Quarterly Consultation No.33 – CP21/27 (September 2021): The (FCA published a Consultation Paper which includes proposals, among other things, to amend the rules on corporate reporting in machine-readable electronic format under DTR 4. Further details are here.

Diversity

BEIS: Ministers renew efforts to increase opportunities for talented women at the top of UK business (November 2021): The UK Government has announced that it will back a new five-year review to monitor women’s representation in the upper rungs of FTSE companies, namely The FTSE Women Leaders Review, and encourage firms to open up opportunities to everyone. New leadership is currently being appointed to steer the review, and take forward new targets over the coming years. Further details are here.

Cranfield University: The Female FTSE Board Report 2021 (October 2021): Cranfield University has published its Female FTSE Board Report 2021. This notes that there has been further progress in terms of the number of women on corporate boards, with the percentage of women in FTSE 100 boards being 38 per cent and 35 per cent in FTSE 250 boards. As a result, all boards in aggregate have met and exceeded the target set by Hampton-Alexander but 21 per cent of the FTSE 100 and 32 per cent of the FTSE 250 still need to meet the 33 per cent target set for the end of 2020. Further details are here.

ESG issues

Glass Lewis: 2022 ESG Initiatives – Policy Guidelines (November 2021): Glass Lewis has published its updated Guidelines on Environmental, Social and Governance (ESG) issues for 2022. Key revisions to the 2021 ESG Guidelines relate to environmental and social risk oversight, Say on Climate votes, guidelines referencing certain topics and written consent from shareholders. Further details are here.

FCA: A strategy for positive change – Our ESG priorities (November 2021): The FCA has published its environmental, social and governance (ESG) strategy which sets out the FCA’s target outcomes and the actions the FCA expects to take to deliver these. The FCA’s aim is to support the financial sector in driving positive change, including the transition to net zero. Further details are here.

Institutional investor guidelines

ISS: Policy changes to its UK Proxy Voting Guidelines for 2022 (December 2021): Institutional Shareholder Services (ISS) has published a summary of the changes it is making to its UK Proxy Voting Guidelines that will apply to company meetings held on or after February 1, 2022. The full revised Proxy Voting Guidelines will be published in due course. Further details are here. This follows the launch of an open comment period on the proposed changes, further details of which are here.

Glass Lewis: 2022 UK Proxy Voting Guidelines (November 2021): Glass Lewis has published its updated UK Proxy Voting Guidelines for 2022. Key revisions to the 2022 UK Proxy Voting Guidelines relate to diversity of ethnicity and national origin at board level. Further details are here.

Narrative reporting

FRC: Areas of supervisory focus for 2022/23 (December 2021): The FRC has announced its areas of supervisory focus for 2022/23, including priority sectors, for corporate reporting reviews and audit quality inspections. These will be supplemented by six thematic reviews which will identify scope for improvement, as well as examples of better practice, in areas of key stakeholder interest. Further details are here.

BEIS: The Reporting on Payment Practices and Performance Regulations Statutory Review – Invitation to Contribute Views and Evidence (November 2021): BEIS has published a document seeking views on the effectiveness of the Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 (together the 2017 Regulations). These introduced a duty on the UK’s large companies and LLPs to broadly report on a half-yearly basis on their payment practices, policies and performance for financial years beginning on or after April 6, 2017. Further details are here.

FRC: Annual Review of Corporate Reporting 2020/21 (October 2021): The FRC has published its Annual Review of Corporate Reporting, which outlines the FRC’s ‘top’ areas where improvements to reporting are required. The FRC reviewed 246 reports and accounts and wrote to 97 companies with substantive questions about their reports. Overall, the review found the quality of reporting remained unchanged, despite the impact of the Covid-19 pandemic. However, significant non-compliance was found at 15 companies that were required to restate their accounts. Further details are here.

FRC: Key matters for 2021/22 reports and accounts (October 2021): The FRC has published, alongside its Annual Review of Corporate Reporting, a summary of key matters that are relevant to the 2021/22 financial reporting season. This summary addresses the FRC’s areas of focus for the coming year and identifies what the FRC expects to see in high quality reports and accounts. It highlights key messages and provides links to other documents in which more information can be found, including sections outlining relevant FRC publications and year-end developments. It also discusses recent changes to corporate governance, and narrative and financial reporting. Further details are here.

FRC: Thematic Review – IAS 37 Provisions, Contingent liabilities and Contingent assets’ (October 2021): The FRC has published the findings of its Thematic Review into IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’, which has been identified as a recurrent problem area by the FRC. Further details are here.

FRC: Thematic Review – Alternative Performance Measures (APMs) (October 2021): The FRC has published a thematic review assessing the quality of Alternative Performance Measure (APM) reporting in the UK, five years after the implementation of the European Securities and Markets Authority Guidelines on APMs (ESMA Guidelines) and the introduction of the IOSCO statement on Non-GAAP Financial Measures (IOSCO statement). The review also follows on from the FRC’s most recent APM thematic review report, published in November 2017. Further details are here.

FRC: Thematic Review – Viability and Going Concern (September 2021): The FRC has published a document summarising the key findings of its review of the viability and going concern disclosures for a selection of annual reports and accounts for Main Market and AIM listed companies with year ends between December 2020 and March 2021. It aims to provide useful guidance for preparers of annual accounts by identifying areas where viability and going concern disclosures could be improved, and by providing examples of better disclosures. Further details are here.

FRC: Thematic Review – Streamlined Energy and Carbon Reporting (September 2021): The FRC has 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. Further details are here.

FRC: FRC Lab Report – Reporting on risks, uncertainties, opportunities and scenarios (September 2021): The FRC’s Financial Reporting Lab has published its latest report on what investors want to understand from company reporting on the connected areas of risks, uncertainties and opportunities. The report notes that that there remains a gap between the information users want and the disclosures that organisations provide and it comments that this disclosure gap is likely to widen with climate-related uncertainty and an increased demand for enhanced Environmental, Social and Governance (ESG) reporting. Further details are here.

FRC: The future of corporate reporting - Feedback Statement (September 2021): On July 30, 2021 the Financial Reporting Council (FRC) published a Feedback Statement following publication in October 2020 of a Discussion Paper, A Matter of Principles: The Future of Corporate Reporting. The Feedback Statement summarises the views of respondents to the initiatives outlined by the FRC in the Discussion Paper, as well as next steps. Further details are here.

Remuneration

Glass Lewis: Approach to executive compensation in the context of the Covid-19 pandemic (December 2021): Glass Lewis has published an updated version of its approach to executive pay, last published in January 2021. The only change of substance is to remove specific references to fiscal years in order to clarify that the guidance outlined in the document will continue to apply throughout the course of the COVID-19 pandemic, particularly for companies and industries that continue to be affected by the pandemic. Further details are here.

Investment Association: Principles of Remuneration 2022 and letter to Remuneration Committee Chairs (November 2021): The Investment Association has published its Principles of Remuneration for 2022, together with a letter to the Chairs of Remuneration Committees which summarises the key changes from the 2021 Principles of Remuneration and sets out the areas of focus of IA members for the forthcoming season of Annual General Meetings (AGMs). Further details are here.

Stewardship

FRC: Effective Stewardship Reporting – Examples from 2021 and Expectations for 2022 (December 2021): The FRC has published a report on reporting under the UK Stewardship Code 2020 (the Stewardship Code). This sets high standards for asset owners, asset managers, and the service providers that support them, to report on their stewardship activities and their outcome. The aim of the report is to encourage fair, balanced and understandable reporting about stewardship and to explain what the FRC expects stewardship reports to include. This is illustrated with examples of good reporting. Further details are here.

FRC: Successful signatories to UK Stewardship Code listed (September 2021): The FRC has 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. Further details are here.