Essential Corporate News – Week ending January 18, 2019

Publication January 18, 2019


Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.

European Commission: Report of Technical Expert Group on Sustainable Finance’s Report on Climate-Related Disclosures

In June 2018, the European Commission set up a Technical Expert Group on Sustainable Finance (TEG) to assist it in developing aspects of its Sustainable Finance Action Plan published in March 2018. One aspect is guidance to improve corporate disclosure of climate-related information that could be included in the European Commission’s guidelines on the Non-Financial Reporting Directive (NFRD). On January 10, 2019 the TEG published its first report on climate-related disclosures by companies. The report includes proposals for disclosing not just how climate change might influence the performance of a company, but also the impact of the company itself on climate change.

The NFRD applies to traded companies, banks and insurance companies with more than 500 employees. The proposed guidance contained in the report is intended to assist such companies in developing climate-related disclosures that comply with the NFRD and satisfy the June 2017 recommendations of the Task Force on Climate-related Financial Disclosures. Specific disclosures and guidance are set out for each of the five categories of the NFRD requirements: business model; policies and due diligence processes; outcomes; principal risks and their management; and key performance indicators.

The recommended disclosures are further differentiated based on companies’ exposure to climate change. The "general disclosures" or "Type 1" refer to information that companies should disclose. At a minimum, a company is expected to report certain disclosures, irrespective of the company’s own assessment. The ‘supplementary disclosures or ‘Type 2’ refer to information that companies should consider reporting on and depend on a company’s own assessment of impacts of climate change on its business and of its activity on climate change, carried out autonomously and in consultation with stakeholders.

Comments on the report are requested by February 1, 2019. The TEG will report to the European Commission on the responses but will not produce a revised version of the report. The TEG’s report will be taken into account when the European Commission updates the non-binding guidelines on non-financial disclosure that accompany the NFRD AND the European Commission intends to consult on an update of the NFRD guidelines prior to their planned adoption in June 2019.

(European Commission: Technical Expert Group on Sustainable Finance climate-related disclosures report, 10.01.19)

(European Commission: Technical Expert Group on Sustainable Finance climate-related disclosures report press release, 10.01.19)

IOSCO: Report on good practices for audit committees in supporting audit quality

On January 17, 2019 the International Organization of Securities Commissions (IOSCO) published a report on the role of audit committees of listed companies in supporting and promoting external audit quality.

The report looks at the role of audit committees and audit quality, as well as at the role of some other key parties in the financial reporting cycle. It also outlines good practices regarding the features an audit committee should have to be more effective in promoting and supporting audit quality. These are as follows

  • Features of audit committees that support audit quality: Common features include that at last one member, preferably the chair, should have a good knowledge of financial reporting and/or audit and all members should between them have an appropriate understanding of financial reporting and audit and knowledge of the industry in which the company operates. The chair should have demonstrated leadership qualities, strong communication skills and be knowledgeable about the duties and responsibilities of the position.
  • Recommending the appointment of an auditor: Audit committees should develop a recommendation on the selection of auditors independently of management with selection criteria set up front and tenderers assessed against those criteria. The focus should be on audit quality and not fee reduction. Opinion shopping should be avoided and auditor independence should be a key consideration.
  • Assessing potential and continuing auditors: In assessing the auditors, and the adequacy and appropriateness of audit resources, audit committees should consider matters such as the auditor’s knowledge of the listed company´s business and industry, the extent of involvement of senior team members in the audit, use of other auditors, use of technical and specialist expertise, the capability accessible by the auditor in different geographical locations, coverage of internal systems and controls, and how the engagement partner and team are accountable within their firm for audit quality.
  • What matters should be considered in setting audit fees: Audit committees should consider the extent to which audit fees are consistent with the audit plan and a quality audit.
  • Facilitating the audit process: Audit committees should promote quality and timely reporting by seeking explanations and advice on the appropriateness of accounting treatments and estimates, proper books and records, and systems and controls, which can facilitate a quality audit and avoid issues being missed or not adequately addressed due to deadline pressures.
  • Assessing auditor independence: Audit committees should review and challenge management’s accounting treatments and estimates, and should not feel encumbered by management to consult with, when considered necessary, an external party (for example and as applicable, a regulator) in carrying out their duties. The audit committee should oversee the development of policies on auditor independence, undertake procedures to satisfy itself on the independence of the auditor and require non-audit services to be subject to its prior approval, and consider other matters affecting auditor independence.
  • Communicating with the auditor: Audit committees should have open, timely and meaningful communication with auditors about risks, issues and other matters to assist each of them in performing their respective roles in overseeing the financial reporting process and conducting a quality audit.
  • Assessing audit quality: Audit committees should assess audit quality with regard to enquiry, observation and how the auditor addresses findings by audit regulators.

(IOSCO: Report on good practices for audit committees in supporting audit quality, 17.01.19)

BEIS: Government’s response to BEIS Committee report on gender pay gap reporting

On January 17, 2019 the House of Commons Business, Energy and Industrial Strategy (BEIS Committee) published the Government’s response to the report on gender pay gap reporting published by the BEIS Committee in August 2018 (BEIS Report).

The Government addresses some of the recommendations in the BEIS Report, including the following

  • The BEIS report recommended that the Government reviews the gender pay gap reporting requirements with a view to aligning them with other business reporting requirements but the Government notes that there is no other common reporting requirement that logically aligns with gender pay gap reporting, so the focus has been on balancing transparency of data with flexibility for employers.
  • The BEIS report recommended that organisations should be required to provide some narrative reporting with their gender pay statistics and an action plan setting out how pay gaps are being and will be addressed. While the Government considers an action plan crucial to closing gender pay gaps (and guidance on the kinds of actions employers can take has been published), it deliberately did not make publishing an action plan mandatory as this might result in a prescriptive format with limited value to employers and employees.
  • The BEIS Report recommended that the qualifying threshold be reduced from 250 to 50 employees. The Government is concerned that data from smaller organisations could be unreliable and the requirement too burdensome, but will consult on the feasibility if there is sufficient appetite for lowering the threshold in future reporting years.
  • The BEIS Report recommended that in revising the UK Stewardship Code, the Financial Reporting Council (FRC) include reference to ensuring that gender diversity is properly reflected throughout the company, notably at board level. The Government states that the FRC will consider ow a revised Stewardship Code can support and challenge investors to improve diversity and succession planning in UK listed companies.

(BEIS: Government’s response to BEIS Committee report on gender pay gap reporting, 17.01.19)

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