Essential Corporate News: Week ending February 25, 2022

BEIS: Mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs – Non-binding guidance

On February 22, 2022 the Department for Business, Energy and Industrial Strategy (BEIS) published non-binding guidance (Guidance) to help companies and limited liability partnerships (LLPs) understand how to meet new mandatory climate-related financial disclosure requirements under the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022. These Regulations were made on January 17, 2022 and apply to reporting for financial years starting on or after April 6, 2022.

The Regulations require certain publicly quoted companies, large private companies and LLPs to incorporate TCFD aligned climate disclosures in their annual reports. Companies and LLPs within scope will be required to include disclosures on climate change-related risks and opportunities where these are material. The disclosures should cover how climate change is addressed in corporate governance, the impacts on strategy, how climate-related risks and opportunities are managed, and the performance measures and targets applied in managing these issues. The purpose of Guidance is to provide answers to commonly asked questions to help companies and LLPs within scope to apply the Regulations and to set out the outcomes desired in respect of each element of the disclosure requirements common to the Regulations.

The Guidance covers the following areas:

Scope of the Regulations

The Guidance covers the following questions:

• Will disclosure be required at the group or subsidiary level? - Companies are expected to report at the group level (or at the company level if not included within consolidated group reporting). Subsidiaries whose activities are included within a consolidated group report of a UK parent that complies with the climate-related financial disclosures requirements are not required to report separately.
• Will UK companies be required to report on their global operations or just their UK operations? - When a UK group is in scope the top UK parent is expected to report, within its Annual Report, on the global operations of the UK group (regardless of whether activities are conducted through a UK subsidiary or an overseas subsidiary).
• Will UK companies with an overseas parent company be exempt? - There is an exemption from the disclosure requirements at company level where that company’s activities are included in a consolidated report and there is a UK parent company. Where a UK company has an overseas parent which reports on a consolidated basis, the exemption does not apply.
• What happens if a company or LLP within scope does not comply with the disclosure requirements? – The Guidance notes the Financial Reporting Council’s (FRC) powers in this area.

Timing of the requirements

The Regulations come into force on April 6, 2022 and will be applicable for accounting periods starting on or after that date.

Reporting requirements

The Guidance sets out the information to be disclosed under the Regulations, and confirms where it should be disclosed. Companies in scope should include these disclosures in the Non-Financial and Sustainability Information Statement in the Strategic Report. LLPs in scope should include their disclosures in either the Energy and Carbon Report of their Directors’ Report or, for those LLPs which prepare a Strategic Report, in that report.

The Guidance also looks at the information companies and LLPs should include on each element of the reporting requirements, noting that the Regulations require companies and LLPs to make certain disclosures, aligned with the recommendations issued by the international Task Force on Climate-related Financial Disclosures (TCFD). The Guidance points out that these disclosures are based on, but do not directly mirror the recommendations from the Task Force as the TCFD’s recommendations have been adapted so that they are suitable for inclusion in UK legislation.

The Guidance also looks at the level of detail required in disclosures, confirms that the information required to meet the disclosure requirements can be disclosed elsewhere in the Annual Report if it is cross-referred to in the Non-Financial and Sustainability Information Statement, confirms that there is no prescribed format or structure for the disclosures, and confirms that while a company or LLP may choose to make use of information which is generated by a third party in order to help them assess the climate-related risks, for example, by contracting with a data provider to support the assessment and disclosure of physical risks for certain assets or infrastructure, the legal duty to make the climate-related financial disclosures remains on the directors.

Interaction with other regulation and frameworks

The Guidance considers the interaction with other existing requirements.

In relation to the FCA’s Listing Rule requirements on TCFD disclosures, it states that where a UK-registered listed company is subject to both sets of requirements, disclosure in a manner consistent with all of the TCFD recommendations and recommended disclosures for the purposes of the FCA’s Listing Rule in its Annual Report is likely to involve use of similar information to the disclosures required by the Regulations so it is normally likely to meet the requirements of the Regulations.

In addition, the interaction with the requirements for occupational pension schemes to take actions on climate risk, the Streamlined Energy and Carbon Reporting requirements, accounting standards and financial statements, and the development of International Sustainability Disclosure Standards are considered in the Guidance. It also includes a non-exhaustive list of further guidance produced by other bodies related to the TCFD recommendations.

(BEIS, Mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs – Non-binding guidance, 22.03.2022)

FRC: Wates Corporate Governance Principles for Large Private Companies – The Extent, Coverage and Quality of Corporate Governance Reporting

On February 23, 2022 the Financial Reporting Council (FRC) published the results of research into how large private companies within scope of the requirement in the Companies (Miscellaneous Reporting) Regulations 2018 (Regulations) to produce a corporate governance report are meeting that requirement by applying the Wates Corporate Governance Principles (Wates Principles) or an alternative corporate governance code or approach. Of those companies who have chosen to follow the Wates Principles, the research also considered the quality of their reporting.

The research found that two-thirds of companies within the scope of the Regulations reported on corporate governance either within their directors’ report or elsewhere in their annual report. Of these, 57% relied on a corporate governance code to define their arrangements, 35% stated that they relied on alternative corporate governance arrangements and 8% failed to report meaningfully on their corporate governance arrangements. The Wates Principles were by far the most widely adopted corporate governance code. Some companies chose to refer to more than one code: ten companies referred to two codes, and one referred to three. Of those companies that did not apply a recognised corporate governance code, very few provided a rationale for non-application.

The research found that the vast majority of companies that used the Wates Principles provided some form of explanation of how each Principle was applied. When comparing how companies reported across all Principles, the report notes that companies tended to disclose more information about how their corporate governance practices and policies have matured over the years (for example, the structure and composition of committees, role of independent directors, line of accountability for directors). They provided good levels of disclosure in terms of general information about their formal policies but relatively lower levels of disclosure when it came to how these policies are applied in practice.

The report concludes that there is room for improvement in reporting and, in particular, it recommends the following:

• companies should disclose more detailed information in relation to the application of the six Principles to provide readers with a comprehensive understanding of the corporate governance arrangements in place and how these are mapped to the respective Principles;
• companies should discuss more instances and/or circumstances relating to a given corporate governance practice to evidence how they have applied the Principles; and
• companies should use more cross-references, as in several cases the disclosure of some items could be found in other sections of the annual reports, but these were difficult to track down without the provision of cross-references.

(FRC: Wates Corporate Governance Principles for Large Private Companies – The Extent, Coverage and Quality of Corporate Governance Reporting. 23.02.2022)

BEIS: FTSE Women Leaders Review - Achieving gender balance

On February 22, 2022 a new report by the Government-backed FTSE Women Leaders Review, which monitors women’s representation in 24,000 positions on FTSE 350 Boards and in leadership teams of the UK’s biggest companies, building on the success of the previous Hampton-Alexander and Davies Reviews, was published. This reports on progress to date and includes four new recommendations for FTSE 350 companies.

Progress to date - Combined Executive Committee and Direct Reports

The report notes that the FTSE 100 has made steady progress, with the number of women in the Combined Executive Committee and Direct Reports increasing to 32.5%, up from 30.6% last year. The total number of roles in the population has increased in the year, with the number of women on the Executive Committee remaining largely flat, and stronger progress made in the Direct Reports population. 44 FTSE 100 companies have met, or exceeded the 33% target from the prior Hampton-Alexander Review, including 15 companies with 40%, or more women in their Leadership teams. The FTSE 250 similarly has made good progress, with the number of women in the Combined Executive Committee and Direct Reports increasing to 30.7%, up from 28.5% last year. The total number of roles in the population has increased in the year, with good growth in both the number of women on the Executive Committee and in the Direct Reports population.

Progress to date - Women on boards

The report states that the FTSE 100 has made good progress, with women’s representation now standing at 39.1%, up from 36.2% at the beginning of 2021. On an individual company basis 85 FTSE 100 boards have met, or exceeded the prior 33% target, and almost half of all FTSE 100 companies now have 40% or more women on their board. The FTSE 250 has similarly made good progress, with women’s representation now standing at 36.8%, up from 33.2% at the beginning of 2021. Almost 200 boards (77%) have met, or exceeded the prior 33% target, and 92 FTSE 250 companies now have 40%, or more women on their board.

The number of women in the most senior board roles has also increased, with 48 women Chairs and 115 women occupying the Senior Independent Director role. Almost half of all FTSE 350 Boards now have a woman in either the Chair, or Senior Independent Director roles. The number of 'One & Done' boards has markedly reduced to six, down from 74 at the end of 2018.

The report notes that the UK now ranks higher than ever this year when compared internationally, with the FTSE 100 in second place behind France.

New recommendations

The report sets out four new recommendations as follows:

• An increased voluntary target for FTSE 350 boards, and for FTSE 350 leadership teams to a minimum of 40% women, by the end of 2025.
• FTSE 350 companies to have at least one woman in the Chair or Senior Independent Director role on the board, and/or one woman in the Chief Executive or Finance Director role in the company, by the end of 2025.
• Key stakeholders, such as investors and corporate governance agencies to set best-practice guidance, or have mechanisms in place to encourage FTSE 350 boards that have not achieved the prior 33% target, to do so. In addition, FTSE 350 boards below 33% women, should look to the underrepresented gender when considering additional appointments.
• The scope of the Review is extended to include the largest 50 private companies in the UK by sales to further drive progress.

The report has been welcomed by the Government which states that it highlights the success of the UK’s voluntary, business-led approach to setting targets for getting more women on boards, as the UK has progressed from fifth to second in the international rankings at FTSE 100 level, leapfrogging countries such as Norway, which enforces a mandatory quota system on businesses.

(BEIS, FTSE Women Leaders Review - Achieving gender balance, 22.02.2022)

(BEIS, Sea-change in UK boardrooms as women make up nearly 40% of FTSE 100 top table roles, 22.02.2022)

PLSA: Stewardship and Voting Guidelines 2022

On February 23, 2022 the Pensions and Lifetime Savings Association (PLSA) published their latest Stewardship and Voting Guidelines to provide a framework for pension schemes trustees, and investors generally, to ensure that companies are held to account on key issues in the 2022 AGM season.

Key changes from the 2021 Stewardship and Voting Guidelines include the following:

• Virtual AGMs – The PLSA notes that the move to virtual AGMs during the pandemic has not impacted voter turnout and it continues to support their use currently to ensure shareholder participation. However, in light of concerns that virtual AGMs could reduce shareholder engagement opportunities with the board if they become a permanent feature, it urges companies to look at how they can increase their shareholder engagement opportunities.
• Good company behaviour in relation to culture - As in 2021, the PLSA believes that companies should be active in responding to the challenges posed by the pandemic on the workforce. For example, whether steps were taken to enable working from home and/or prioritizing the safety of staff, and what provisions were made to accommodate challenges caused by the virus. The PLSA now state that this information should be disclosed to investors.
• Diversity and inclusion policy – The PLSA will expect to see a clear description of the board’s policy on inclusion as well as diversity, including professional, international, and protected characteristics such as gender (matching the Hampton Alexander Review of at least 33% of FTSE 350 board members), ethnicity (matching at least the Parker Review of at least one board member (for FTSE 100) by 2021 (2024 for FTSE 250) and could include whether they are a signatory to the Race at Work Charter or equivalent), disability this could include whether they are a Disability Confident employer in the UK), sexuality, gender reassignment, marital status and religion/belief systems, as well as other non-protected characteristics such as socio-economic background, neurodiversity, veterans and returners to workplace.
• Remuneration – In light of the impact of the pandemic and cost of living increases, the PLSA expects companies to demonstrate caution in remuneration packages in 2022. It also wants to see more packages linked to clear targets for achieving performance against the company’s climate goals.
• Climate change – The PLSA now expects that companies are referencing the Taskforce for Climate Related Financial Disclosure (TCFD) in their reports, in order to enable investors to fully assess the extent of the climate risk. When investors are considering voting in favour of relevant climate-related or similar resolutions, including Say on Climate resolutions, they should make assessments on a case-by-case basis

(PLSA, Stewardship and Voting guidelines 2022, 23.02.2022)