FCA: Primary Market Bulletin No. 36
On November 15, 2021 the Financial Conduct Authority (FCA) 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.
Specific TCFD aligned climate-related disclosure requirements for premium listed commercial companies are set out in LR 9.8.6R(8) and these requirements came into force for financial years beginning on or after January 1, 2021. As a result, the first annual financial reports including disclosures subject to this Listing Rule will be published from January 2022.
To achieve a level of consistency between premium listed issuers and certain standard listed issuers, the FCA consulted (in CP21/18) on extending the application of these TCFD-aligned disclosure requirements and guidance to issuers with standard listed equity shares under LR 14 (other than standard listed investment entities and shell companies). Following the consultation, the FCA aims to finalise these rules in time for them to apply for financial years beginning on or after January 1, 2022. This means that the first annual financial reports including disclosures subject to a standard listing rule will be published from January 2023.
In the PMB, the FCA states that to help listed companies, their directors and advisers it proposes to publish a technical note giving further guidance on the FCA’s disclosure expectations on which it is seeking feedback (see further below).
The FCA points out that while it is responsible for monitoring and where necessary enforcing compliance with LR 9.8.6R(8) (and will also be responsible for the proposed LR 14.3.27R), which covers TCFD-aligned disclosures, and for determining an appropriate supervisory strategy, the Financial Reporting Council (FRC) will play a significant role in discharging this strategy. As the disclosures required under LR 9.8.6R(8) and the proposed LR 14.3.27R are deemed to be an ‘accounting requirement’, the FRC is responsible for keeping these disclosures under review. From 2022, the review of TCFD-aligned disclosures will be embedded into the FRC’s routine reviews of premium listed company annual financial reports and, it is proposed, from 2023, would be embedded into routine reviews of relevant standard listed company annual financial reports.
In the PMB, the FCA explains that if a listed company’s disclosures do not appear to meet the requirements of the Listing Rules, the FRC is likely, in the first instance, as part of its routine reviews of annual financial reports, to contact the company setting out the issues and asking for further information. Based on this information, the FRC may ask the company to take corrective or clarifying action, such as undertaking to enhance their disclosures in subsequent reports and accounts. While the FCA would expect matters to be satisfactorily addressed through this type of engagement without the need for further action regarding the published disclosures, if the FRC is unable to reach a satisfactory conclusion through engagement, the matter will be referred to the FCA to take appropriate action.
In addition, the FRC will refer matters to the FCA which are identified as containing potentially false or misleading information, including the omission of material facts, likely to cause investor harm or which may breach other relevant FCA rules for environmental, social and governance (ESG) matters.
If a listed company fails to make a statement in their annual financial report regarding the disclosure of climate-related financial information under the TCFD framework, as required by the Listing Rules, then the FCA will request that the listed company publishes the TCFD statement via a Regulatory Information Service (RIS) in line with the Listing Rules as soon as possible after discovery. The FCA states that any non-compliance will be viewed seriously and will lead to action using the full suite of powers, as well as sanctions, where appropriate.
The FCA will also work collaboratively with the FRC to review concerns raised by stakeholders against issuers about the quality of TCFD-aligned disclosures and determine what action the FCA should take, if any, and how best to respond. The FCA will consider both possible breaches of the Listing Rules and possible breaches of other relevant regulations or FCA rules for ESG. The FRC will consider possible breaches of other relevant reporting requirements, including related disclosure requirements under the Companies Act 2006.
The FCA considers the announcement by the IFRS Foundation to establish the ISSB at COP26 in November 2021 as a catalyst for change in the area of sustainability disclosures and states that it is working with the Department for Business, Energy and Industrial Strategy (BEIS) to endorse and implement the future ISSB ‘climate first’ standard in the UK. The FCA will also continue to evolve its supervisory strategy in the coming years and will provide more information in further PMBs as appropriate.
Consultation on new Technical Note for Knowledge Base
The PMB includes a link to a new draft Technical Note, ‘Primary Market/TN/802.1 – TCFD aligned climate-related disclosure requirements for listed companies’. This summarises the relevant disclosure requirements in the Listing Rules and then sets out guidance for where a listed company has not included climate-related financial disclosures consistent with all of the TCFD recommendations and recommended disclosures in either its annual financial report or in another document as referred to in LR 9.8.6R(8)(b)(i) [and LR 14.3.27R(2)(a)]. For example, the FCA considers that:
- When providing the reasons for not including such disclosures, listed companies should provide full, clear and meaningful explanations for not including such disclosures. The explanations should be written in plain language that is easy to understand and leaves no room for ambiguity.
- Where a listed company provides details of any steps it is taking or plans to take in order to be able to make those disclosures in the future, and the timeframe within which it expects to be able to make those disclosures (LR 9.8.6R(8)(b)(ii)(C) [and LR 14.3.27R(2)(b)(iii)]), it should provide sufficient level of detail so that investors can fully understand the nature of the proposed action.
Where a listed company states in its compliance statement that it has made climate-related financial disclosures that are consistent with the TCFD recommendations and recommended disclosures, the FCA points out that these disclosures should include sufficient, company-specific information to support decision-making by investors. In addition, while listed companies may seek the views of third parties (including external auditors and other advisers) when compiling and reviewing the climate-related financial disclosures to be included in their annual financial report, they are reminded that it is ultimately for a listed company, using its knowledge of the company’s actual and expected activities, operating environment and exposure to physical and transition risks, to ensure that it complies with LR 9.8.6R(8) [ or LR 14.3.27R (as appropriate)].
Listed companies are also reminded that there are other provisions relating to ESG matters that they have to comply with and more information on these provisions is set out in Technical Note TN 801.1.
(FCA, Primary Market Bulletin No. 36, 15.11.2021)
BEIS: Guidance to help businesses understand their obligations under National Security and Investment Act
On November 15, 2021 the Department for Business, Energy and Industrial Strategy (BEIS) published guidance to help businesses understand their legal duties under the National Security and Investment Act 2021 (NSI Act) which comes into full force on January 4, 2022. In addition, on November 16, 2021 four Statutory Instruments relating to the NSI Act, which come into force on January 4, 2022, were made.
The guidance aims to helps businesses and investors to:
- assess whether the government must be notified of an acquisition - mandatory notification will apply across 17 sensitive areas of the economy (including Artificial Intelligence and Civil Nuclear); and
- understand what to expect when they submit a notification form and go through the NSI notification and assessment process - this includes information on what parties can expect while their acquisition is being considered, such as requests for further information and when to expect final decisions on clearance.
It builds on guidance issued in July 2021 which covered:
- an overview of the NSI Act;
- how the NSI Act could affect people or acquisitions outside the UK;
- how the NSI Act works with other regulatory requirements;
- and information for the higher education and research sectors.
The Government has made four pieces of secondary legislation, all of which come into force on January 4, 2022, as follows:
(BEIS: Guidance to help businesses understand their obligations under National Security and Investment Act, 15.11.2021)
Takeover Panel: Panel Bulletin 3 – Requirements in relation to irrevocable commitments and letters of intent
On November 17, 2021 the Takeover Panel published Panel Statement 2021/24 announcing the publication of Panel Bulletin 3 concerning Rule 2.10( c) of the Takeover Code and requirements relating to irrevocable commitments and letters of intent.
In the Bulletin, the Panel Executive states that it is aware of a number of cases recently in which a shareholder which had given a letter of intent to an offeror to accept an offer or to vote in favour of a scheme of arrangement sold shares which were subject to the letter of intent without a prompt announcement of the relevant details being made, either by the shareholder or the offeror.
The Bulletin reminds shareholders and other persons interested in shares that, if they become unable, or no longer intend, to comply with the terms of an irrevocable commitment or letter of intent, either in whole or in part, they must promptly either make an announcement or notify the relevant party to the offer and the Panel Executive.
Offerors and offeree companies are also reminded that they must make a prompt announcement if they receive a notification from a person from whom they have procured an irrevocable commitment or letter of intent to the effect that the person will be unable to comply with the terms of the commitment or letter.
(Takeover Panel: Panel Bulletin 3 – Requirements in relation to irrevocable commitments and letters of intent, 17.11.2021)
Investment Association: Principles of Remuneration 2022 and letter to Remuneration Committee Chairs
On November 18, 2021 the Investment Association (IA) 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).
Key changes to the Principles of Remuneration
The IA has made some updates to the Principles to reflect developments in market practice and investor expectations. These are in the following areas:
- Levels of Remuneration - The Principles have been updated to emphasise that Remuneration Committees should provide a clear rationale for an increase to any element of, or to the overall level, of remuneration.
- Value Creation Plans (VCPs) - Given the increased adoption of VCPs over the last AGM season, the Principles have been updated to include a specific section on investor expectations on VCPs.
- Grant Size - The Principles have been updated to reflect investor preference for companies to reduce awards at grant where share prices have fallen rather than relying on discretion when awards vest.
The IA has also generally updated the Principles to reflect current market practice and expectations.
Areas of focus for the next AGM season
- COVID and the stakeholder experience - In April 2020, the IA published Shareholder Expectations on Executive Remuneration during the COVID-19 pandemic, which emphasised the need for Remuneration Committees to sensitively balance the need to continue to incentivise executive performance and ensure the executive experience is commensurate with that of shareholders, employees and other stakeholders. The IA points out that these guidelines remain important and IVIS will continue to monitor companies against them during the next AGM season. The IA’s call for companies to show restraint where they have taken and not repaid government support during the year under review and the need not to pay annual bonuses in such cases also remains unchanged. The IA and its members expect companies to continue to factor the shareholder and stakeholder experience into their remuneration decisions and clearly communicate the approach the company has taken.
- ESG Metrics in Executive Remuneration – As more companies are incorporating the management of material ESG risks and opportunities into their long-term strategy, Remuneration Committees are reminded that they should be incorporating the management of these material ESG risks as performance conditions in the company’s variable remuneration. In doing so they should select ESG metrics that are quantifiable and clearly linked to company strategy. The rationale for the selected ESG performance metrics and targets should be disclosed to investors, as with any other performance condition. Where companies have incorporated ESG risks and opportunities into their long-term strategy but have not yet incorporated ESG metrics into their remuneration structures, they should explain to shareholders how they will be incorporating ESG metrics into the remuneration structure and the approach they will take in future years.
Approach to pensions in 2022
IA members continue to believe that pension contributions for executive directors should be aligned with those available to the majority of the company’s workforce. Where the pension contributions for incumbent directors are above the majority of the workforce rate, Remuneration Committees are expected to set out a credible action plan to align the pension contributions of incumbent directors to the majority of the workforce rate by the end of 2022. In light of this, IVIS will:
- Red Top any new remuneration policy that does not explicitly state that any appointed executive director will have their pension contribution set in line with the majority of the workforce.
- Red Top any remuneration report where executive pension contributions are not aligned to the majority of the workforce rate or there is not a credible action plan to align pension contributions for incumbent directors by the end of 2022.
(Investment Association, Principles of Remuneration 2022, 18.11.2021)
(Investment Association, Letter to Remuneration Committee Chairs, 18.11.2021)
FRC: FRC and FCA Joint Letter to CEOs on structured reporting for issuers with transferable securities admitted to trading on a UK regulated market
On November 15, 2021 the Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC) sent a joint letter to Chief Executive Officers (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.
The requirements in the DTRs will mean that electronic data for thousands of companies will become available for automatic extraction, analysis and comparison but that data will only be useful if it is of high quality. As a result, the letter reminds CEOs of their obligations. The letter also sets out expectations on quality and identifies actions the FRC and FCA may take in the event of their expectations not being met.
Among other things, the DTRs require issuers with transferable securities admitted to trading on UK regulated markets to publish their annual financial reports in a structured XHTML web browser format and to file these with the FCA’s National Storage Mechanism (NSM). CEOs are reminded that mandatory filing comes into force for financial years starting on or after January 1, 2021, for filing from January 1, 2022, so issuers will need to review DTR 4.1 to check whether these requirements apply, and to what extent they apply, to them.
The letter refers CEOs to an October 2021 FRC Financial Reporting Lab report, Structured reporting: an early implementation study, which sets out key issues in relation to tagging and other matters that issuers should consider. The FCA and FRC will expect issuers to devote the same level of care and attention to the XHTML annual financial report as they do to the PDF or printed form and they strongly encourage issuers to take advantage of the opportunity to file accounts in the new electronic format voluntarily to help ensure they are familiar with the requirements and the submission process before the mandatory requirements are in place.
Together the FCA and FRC (via the Financial Reporting Lab) will consider the quality and usability of the structured annual financial reports in the first year of mandatory adoption and will collectively publish a follow-up to the FRC Lab’s review of best practices later in 2022. They may take further action if quality does not meet their expectations.
(FRC: FRC and FCA Joint Letter to CEOs on structured reporting for issuers with transferable securities admitted to trading on a UK regulated market, 15.11.2021)
FRC Developments in Audit 2021
On November 18, 2021 the Financial Reporting Council (FRC) 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.
The report emphasises that high quality audit remains vital to ensure users of financial statements can confidently rely on the information published by companies in relation to their financial health, their operational performance and their prospects. The FRC notes that this will become even more important as listed companies will, from 2022, be required to report against the Task Force on Climate-Related Financial Disclosures (TCFD).
The FRC point out that professional scepticism and challenge of management remain the two key areas where deficiencies continue in relation to audits and improvement still needs to be made in these areas. However, the FRC has been pleased to see examples of good practice in the use of internal and external specialists to challenge management’s assumptions, the delaying of audit opinion sign-offs to ensure sufficient time was available and robust challenge of the component auditor’s work by group auditors.
The report also includes an overview of the FRC’s supervisory work, audit market trends and new UK auditing standards, including the auditor’s responsibilities relating to fraud, which are designed to further improve assurance for users of accounts.
(FRC, Developments in Audit 2021, 18.11.2021)
BEIS: The Reporting on Payment Practices and Performance Regulations Statutory Review – Invitation to Contribute Views and Evidence
On November 17, 2021 the Department for Business, Energy and Industrial Strategy (BEIS) 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.
The 2017 Regulations provide that the Secretary of State is required to review them and publish the report before April 6, 2022. The report must in particular:
- set out the objectives intended to be achieved by the regulatory provisions established by the 2017 Regulations,
- assess the extent to which those objectives are achieved, and
- assess whether those objectives remain appropriate and, if so, the extent to which they could be achieved with a system that imposes less regulation.
BEIS points out that this is not a public consultation on how the 2017 Regulations might be amended or changed were the Secretary of State to be granted additional powers, and that in terms of developments which may require additional powers, the Government consulted in March 2021, through the “Restoring trust in audit and corporate governance” White Paper, on connected requirements for disclosures on payment practices being made within company annual reports and additional assurance of payment data. It notes that that consultation has closed, and analysis of responses is underway.
Responses to this call for evidence are required by February 4, 2022. The final report by the Secretary of State following the review of responses to this call for evidence will be published before April 6, 2022.
(BEIS: The Reporting on Payment Practices and Performance Regulations Statutory Review – Invitation to Contribute Views and Evidence, 17.11.2021)
Glass Lewis: 2022 UK Proxy Voting Guidelines
On November 16, 2021 Glass Lewis 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.
Diversity of ethnicity and national origin at board level
From 2022, Glass Lewis will generally recommend against the re-election of the chair of the nomination committee at any FTSE 100 board that has failed to appoint at least one director from a minority ethnic group and has failed to provide clear and compelling disclosure for why it has been unable to do so.
The role of a committee chair
Glass Lewis has updated these Guidelines to outline its general approach when its Guidelines outline a recommendation against a committee chair, but the chair is not up for re-election due to the company having a staggered board. In such situations, and on a case-by-case basis, Glass Lewis may recommend that shareholders instead vote against the re-election of (a) long-serving committee member(s).
Remuneration committee performance and accountability
Glass Lewis has updated these Guidelines to outline that it may recommend that shareholders vote against the re-election of the remuneration committee chair where there are substantial concerns with the remuneration policy presented for shareholder approval and/or the pay practices outlined in the remuneration report. In staggered boards where the committee chair is not up for re-election, Glass Lewis may instead recommend that shareholders oppose the re-election of a long-serving committee member. In particularly egregious cases or where there are ongoing concerns with a company’s remuneration policy or practices, Glass Lewis will continue to recommend that shareholders vote against the re-election of all remuneration committee members.
Environmental and social risk oversight
From 2022, Glass Lewis will generally recommend that shareholders vote against the re-election of the governance committee chair (or equivalent) of FTSE 100 companies that fail to provide explicit disclosure concerning the board’s role in overseeing material environmental and social issues.
Clarifying amendments to existing policies.
Clarifying amendments to existing policies
The following clarifications of existing policies are included in the 2022 Guidelines:
- Overall approach to ESG: Glass Lewis has expanded its discussion of environmental, social and governance initiatives in a new section titled “Overall Approach to ESG”. Glass Lewis evaluates all environmental and social issues through the lens of long-term shareholder value. Glass Lewis believes that companies should be considering material environmental and social factors in all aspects of their operations and that companies should provide shareholders with disclosures that allow them to understand how these factors are being considered and how attendant risks are being mitigated.
- Shareholder proposals: In the section titled “Governance Structure and the Shareholder Franchise”, Glass Lewis has added a sub-section titled “Shareholder Proposals”, summarising its existing approach to analysing these proposals. Specifically, Glass Lewis evaluate all shareholder proposals on a case-by-case basis with a view to promoting long-term shareholder value. While Glass Lewis is generally supportive of those that promote board accountability, shareholder rights, and transparency, Glass Lewis consider all proposals in the context of a company’s unique operations and risk profile.
- Linking executive pay to environmental and social (E&S) criteria : Glass Lewis has outlined its current guidance on the use of E&S metrics in the variable incentive programmes for executive directors. Glass does not maintain a requirement of the inclusion of such metrics in incentive programmes and believes companies should be afforded flexibility of their use in either the short- or long-term incentive. Where E&S metrics are included, Glass Lewis expects, as with other types of metrics, robust disclosure on the metrics selected, the rigour of performance targets, and the determination of corresponding payout opportunities. For qualitative E&S metrics, the company should provide shareholders a thorough understanding of how these metrics will be or were assessed.
- Gender diversity: Glass Lewis has amended the language in these Guidelines to clarify that the Glass Lewis assessment of board-level gender diversity is based on the self-identification of directors and that Glass Lewis considers directors that self-identify as non-binary to contribute to the gender diversity of a board.
- Remuneration relative to ownership structure: Glass Lewis has updated this section of the Guidelines to better clarify its approach and expectations when assessing equity incentives granted to executives that are directly or indirectly major shareholders of a company.
- The link between pay and performance: Glass Lewis has restructured this section of the Guidelines, predominantly to better clarify the key considerations that Glass Lewis takes into account when analysing shareholder votes on a company’s remuneration policy and the remuneration report.
(Glass Lewis: 2022 UK Proxy Voting Guidelines, 16.11.2021)
Glass Lewis: 2022 ESG Initiatives – Policy Guidelines
On November 16, 2021 Glass Lewis 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.
Environmental and social risk oversight
Glass Lewis has clarified the factors it considers when evaluating companies’ board-level oversight of ESG-related matters, as well as its approach to holding directors accountable for ESG-related risks.
Say on Climate
Glass Lewis has clarified its approach to management proposals asking shareholders to approve climate transition plans (“Say on Climate”) as well as shareholder proposals asking companies to adopt such a vote. Glass Lewis maintains concerns relating to the Say on Climate vote on the basis of shareholders approving a company’s business strategy, particularly given that sufficient information to fully evaluate the plan is often not available to shareholders. Accordingly, Glass Lewis will generally oppose shareholder proposals requesting that companies adopt a Say on Climate vote.
However, when companies have adopted such a vote, and are asking shareholders to vote on their climate-related strategies, Glass Lewis will evaluate companies’ climate transition plans on a case-by-case basis. In its evaluation, Glass Lewis will consider companies’ disclosure of the board’s role in setting company strategy in the context of the Say on Climate vote as well as disclosure on how the board intends to interpret the vote results and its engagement with shareholders on the issue. In addition, Glass Lewis will evaluate each climate transition plan in the context of each company’s unique operations and risk profile. Glass Lewis looks to companies to clearly articulate their climate plans in a distinct and easily understandable document, which it believes should be aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Glass Lewis has removed guidelines referencing the MacBride Principles, Genetically Modified Organisms, and Sustainable Forestry, as there have not been shareholder proposals on these topics in a number of years. Should proposals on these topics begin to be submitted to shareholder votes in the future, Glass Lewis will likely reincorporate its views on these proposals into future versions of these guidelines.
Glass Lewis has codified its approach to shareholder proposals requesting that companies lower the threshold required to initiate written consent (ie a means for shareholders to act by written consent rather than through voting at a shareholder meeting). When evaluating these proposals, Glass Lewis will generally recommend in favour of lowering the ownership threshold when the company has no special meeting provision, or only allows shareholders owning more than 15 per cent of its shares the ability to call a special meeting. Glass Lewis will generally oppose lowering the ownership threshold necessary to initiate written consent if the company in question has a 15 per cent or lower special meeting threshold.
(Glass Lewis: 2022 ESG Initiatives – Policy Guidelines, 16.11.2021)