Delay to the publication of sustainability reporting standards under the CSRD

The deadline for the EU Commission to publish certain reporting standards under the EU Corporate Sustainability Reporting Directive (CSRD) has been delayed from 30 June 2024 to 30 June 2026.

The CSRD, which came into force in January 2023, sets out disclosures for companies to include in their annual report in relation to sustainability matters. Even though the UK is not part of the EU, the CSRD will impact some UK incorporated companies. The EU Commission is responsible for adopting delegated regulations setting out the detailed standards to be applied by companies when making the sustainability disclosures under the CSRD. The first of these, the general standards, were adopted in July 2023 (for more details on these standards, see our ESG blog post).

The Commission is now required to adopt the sector-specific standards, and the general reporting standards for third-country parent consolidated reporting, by 30 June 2026. Companies will fall within the scope of the third-country parent consolidated reporting obligation where they are EU subsidiaries, or branches, of non-EU entities which meet certain size thresholds, and where the parent entity’s group has significant turnover in the EU.

The obligation on EU subsidiaries/branches to report in line with the standards adopted by the Commission is unchanged and will still apply from financial years beginning on or after 1 January 2028.

For more details on the CSRD, see our corporate governance snapshot here.

Isobel Hoyle
Isobel Hoyle
+44 20 7466 2725

Roddy Martin
Roddy Martin
+44 20 7466 2255

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Consultation on non-financial reporting by medium-sized companies

The Department for Business & Trade has launched a consultation on exempting medium-sized companies from preparing a strategic report as part of their annual report and accounts, following the call for evidence it launched in May 2023 on non-financial reporting. The consultation also seeks views on increasing the maximum number of employees that a company can have in order to be ‘medium-sized’ from not more than 250 to not more than 500 employees.

The government launched the non-financial reporting call for evidence in recognition of the fact that companies’ reporting requirements have expanded over time, increasing the size and complexity of annual reports. For further details on the call for evidence and government response published in March 2024, see our blog post here.

The consultation paper also gives further details on the other steps planned to streamline non-financial reporting that were outlined in the March 2024 government response:

  • Monetary thresholds – the government intends to introduce legislation in summer 2024 to raise the monetary threshold used for the classification of companies as large, medium or small by 50%. The consultation paper spells out that this would mean, for example, to be ‘large’ a company would need to meet two of the following: turnover of £54 million+ (up from £36 million); balance sheet of £27 million+ (up from £18 million); and, subject to the outcome of this consultation, 500+ employees (up from 250);
  • Directors’ report – the legislation will also remove certain disclosures currently required in the Directors’ Report and the Directors’ Remuneration Report. The consultation paper lists the following reporting requirements as those that are expected to be removed, for all companies, from the Directors’ Report: the use of financial instruments, important events affecting the company since the end of the financial year, likely future developments in the business of the company, the research and development activities of the company, branches of the company outside the UK, employment of disabled persons, engagement with employees and engagement with suppliers and customers; and
  • Energy and other reporting requirements – the government does not intend to change the threshold for streamlined energy and carbon reporting until it has undertaken more analysis. There are also other reporting requirements with separate tests dependent on status as well as size, for example quoted companies or public interest entities, which will not be impact by the change in thresholds.

The consultation closes on 27 June 2024.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Greg Mulley
Greg Mulley
+44 20 7466 2771

Caroline Rae
Caroline Rae
+44 20 7466 2916

Non-financial reporting – update on call for evidence

The government has published a ministerial statement and summary of responses following the call for evidence launched in May 2023 on non-financial reporting.

The government launched the call for evidence in recognition of the fact that companies’ reporting requirements have expanded over time, increasing the size and complexity of annual reports. For further details on the call for evidence, see our blog post here.

The respondents to the call for evidence were largely supportive of non-financial reporting but a number of issues were raised around the complexity of reporting, the costs associated with producing the reports and the burden on smaller companies.

The key next steps that have been outlined are:

  • the government intends to introduce legislation in summer 2024 to raise the monetary threshold used for the classification of companies as large, medium or small by 50%. This will lead to a reclassification of a significant number of companies and a resultant change in their reporting obligations;
  • it will also consult on proposals to increase the number of employees that makes a company “medium” from 250 to 500 and to exempt medium companies from the requirement to produce a strategic report; and
  • the legislation will also remove certain disclosures currently required in the Directors’ Report and the Directors’ Remuneration Report.

 

Heidi Gallagher
Heidi Gallagher
+44 20 7466 2367

Isobel Hoyle
Isobel Hoyle
+44 20 7466 2725

Alex Kay
Alex Kay
+44 20 7466 2447

FRC publishes revised version of the Governance Code

The Financial Reporting Council has published a revised version of the UK Corporate Governance Code following the consultation that it launched in May 2023 (for more details, see our blog post here).  As trailed by the FRC in an announcement in November last year, the scope of the changes being introduced by the revised Governance Code has been significantly scaled back from the proposals the FRC consulted on (see our blog post on the FRC’s November 2023 announcement).

The most significant changes are to the reporting requirements in relation to internal controls in Section 4 of the Governance Code, though changes are being made throughout the Governance Code, including in section 1 on outcomes-based reporting; section 3 on diversity, inclusion and equality of opportunity; and to the provisions on remuneration in section 5.  Proposals which the FRC has not taken forward include those relating to director over-boarding and the remit of the audit committee on sustainability matters, and those derived from the audit and governance reporting regulations which were withdrawn by the government in October last year.

The revised Governance Code will apply to financial years beginning on or after 1 January 2025.  However, companies are being given an extra year to comply with the new disclosure requirements in relation to internal controls, with the revised Provision 29 applying to financial years beginning on or after 1 January 2026.

The FRC is updating the guidance which accompanies the Governance Code.  The revised guidance will be published on 29 January 2024.

We have prepared a short overview of the changes being introduced, which is available here.

 

Isobel Hoyle
Isobel Hoyle
+44 20 7466 2725

James Palmer
James Palmer
+44 20 7466 2327

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Half-yearly corporate update – Our latest briefing

We have published our half-yearly update briefing which summarises the major developments in UK corporate law and regulation that have occurred over the last six months, that is from July to December 2023, and which are of relevance to UK listed companies.

The briefing is available here.

 

Michael Jacobs
Michael Jacobs
+44 20 7466 2463

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

 

Draft regulations extending reporting requirements published

The government has published draft regulations to extend and strengthen the Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017.

These two sets of Regulations require large UK companies and LLPs to produce a report on their invoice payment practices every six months and submit the report to a government-hosted website for publication.

The government announced at the end of last year that it would be extending and strengthening the scope of the Regulations – see our blog post here for further information on the additional information that will have to be disclosed.

The draft regulations (which are expected to come into force on 5 April 2024) introduce these additional reporting requirements and confirm that the expiry date for the reporting requirement will now be 6 April 2031.

 

Julie Farley
Julie Farley
+44 20 7466 2109

Robert Moore
Robert Moore
+44 20 7466 2918

Emma Stones
Emma Stones
+44 20 7466 2678

FRC Lab report on structured digital reporting

The Financial Reporting Council (FRC) Lab has published a report on structured digital reporting which sets outs some areas of focus for companies and suggestions to optimise reporting to meet the needs of investors and other users.

Under DTR 4.1.15, listed companies are required to publish their annual reports in structured electronic format (see our snapshot for an overview of the requirements). The FRC report is based on 50 annual reports published in the second year of the requirements being in force.

The FRC’s recommendations relate to three areas:

  • tagging, including creating custom tags only when necessary and to otherwise use standard tags;
  • design and usability, including the use of text-block tags; and
  • process, including whether to seek voluntary assurance of the tagging process.

The report also summarises the findings of research commissioned by the FRC on the use by investors of structured digital reports. The research found that over a third of investors are now using XBRL-format reports as a source of company financial data, as well as more established sources such as PDFs from company websites.

 

Isobel Hoyle
Isobel Hoyle
+44 20 7466 2725

Roddy Martin
Roddy Martin
+44 20 7466 2255

Ben Ward
Ben Ward
+44 20 7466 2093

Primary Market Bulletin 46

The FCA has published Primary Market Bulletin 46 (PMB 46), which contains guidance for market participants on two areas: shareholder co-operation in the context of ESG stewardship, and sponsor procedures in relation to listed companies’ disclosure requirements in line with the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Shareholder co-operation

Under Article 10 of the UK Market Abuse Regulation (UK MAR), it is an offence to unlawfully disclose inside information. The FCA says that, in the wake of the Gent enforcement decision in August 2022 (where Sir Christopher Gent was fined for unlawfully disclosing inside information to two shareholders of a company which he chaired – see our briefing for further details), it received a number of queries about Article 10 and how it applies in specific circumstances. The guidance in PMB 46 focuses in particular on shareholder co-operation regarding ESG stewardship.

The FCA says that two earlier resources on shareholder engagement – a letter it sent to the ABI in August 2009 and Market Watch 20 published by the FSA in May 2007 – are still relevant when considering issues of shareholder engagement, co-operation and activism, notwithstanding the changes in law that have occurred since their publication. The FCA also confirms that the Gent decision has not changed the FCA’s approach to the market abuse regime and that the decision should not prevent engagement between companies and their shareholders.

On strategy and voting intentions, the FCA notes there may be merit in institutional investors making public their ESG stewardship plans to reduce the chance that these plans are viewed as containing inside information and to simplify collective action between shareholders in relation to ESG issues.

TCFD-aligned disclosures and sponsor procedures

Under the Listing Rules, premium and standard listed companies must include climate-related financial disclosures in their annual reports (see our briefing for further details). The FCA has carried out a review of sponsors to assess how they have changed their procedures to ensure that applicants for listing have in place the necessary systems to comply with their TCFD-aligned disclosure obligations on an on-going basis.

The review found that most sponsors had amended their internal policies to reflect that climate-related matters are under increased scrutiny. The FCA also observed that most sponsors used internal expertise when assessing their procedures in this area. The FCA does not expect sponsors to be experts in TCFD-aligned or climate-related reporting but does expect sponsors to have sufficient skills, knowledge and expertise to be able to interpret and apply relevant elements of the FCA Handbook in the specific context of a listed issuer’s business and operations. The FCA also reminds sponsors of the need to ensure that staff involved in sponsor services are provided with appropriate training, including with regard to climate and sustainability reporting developments.

 

Mark Bardell
Mark Bardell
+44 20 7466 2575

Gavin Davies
Gavin Davies
+44 20 7466 2170

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Extension of payment practices reporting regulations and report on general review into payments and cash flow

The Department for Business and Trade (DBT) has published its response on proposals to extend and strengthen the Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017.

These two sets of Regulations require large UK companies and LLPs to produce a report on their invoice payment practices every six months and submit the report to a government-hosted website for publication.

The response, which follows a consultation in January 2023, confirms that the Regulations will be extended beyond the current expiry date of 6 April 2024 for up to seven years, with a review to take place after five years. The information required to be reported under the Regulations will also be expanded to include the following additional information:

  • New reporting metric – Qualifying businesses will be required to report the total value of payments due in the reporting period that have not been paid within agreed terms, in addition to the existing volume reporting requirement;
  • Disputed invoices – An effective method of reporting the proportion of disputed invoices will be introduced (while still including them as late payments in overall payment data);
  • Supply chain finance – The dates to be used for reporting when supply chain finance is used will be made clearer;
  • Retention payments – Construction companies will have to include information on standard retention payment terms and performance; and
  • Sector information – Businesses will be required to include sector identification in their payment reports.

The question of whether businesses should include their payment practices report, or a summary thereof, in their annual report will be considered further following the conclusion of the Non-Financial Reporting review launched in May 2023 (see our blog post here).

The response does not set out a timeline for the amendments to be made but the extension will need to be in place before 6 April 2024.

The DBT has also published a report on its general review into payments and cash flow, which sets out various actions that the government will take to improve payment practices in the UK. As well as the extension and expansion of the Reporting on Payment Practices Regulations, those actions include:

  • using new digital processes at Companies House to help identify businesses which should be complying with the Regulations (see our blog post on the fundamental reforms to, and new powers for, Companies House); and
  • strengthening payment practices across the public sector and excluding suppliers with poor payment practices from public procurement.

Some of these actions require primary legislation so will be subject to the legislative timetable.

Julie Farley
Julie Farley
+44 20 7466 2109

Barnaby Hinnigan
Barnaby Hinnigan
+44 20 7466 2816

Robert Moore
Robert Moore
+44 20 7466 2918

FRC review of corporate governance reporting in 2023

The FRC has published its annual review of corporate governance reporting for 2023, which discusses the quality of reporting against the UK Corporate Governance Code in 2023 and its expectations for companies reporting in 2024.

It follows the release of its annual review of corporate reporting for 2022/23, which sets out the findings of the FRC’s corporate reporting review team on the 2022/2023 reporting season more generally, in October (read more on our blog here).

The FRC reviewed the corporate governance reports of 100 FTSE 350 and Small Cap companies – the sample companies change each year. Of these, 37 claimed full compliance with the Code, compared with 36 of its sample in 2021 and 27 in 2022.

The FRC looked at reporting on cyber and information technology issues as part of its review for the first time this year. Although the FRC recognises that the Code does not specifically ask for reporting on these areas, it was pleased to see most companies in its 2023 sample outline the risks, opportunities and medium to long-term importance of cyber security to their business and market.

The review also states that:

  • the most common areas of non-compliance with the Code from the 2023 sample were pension alignment (provision 38) – although most of those companies expect to be in full compliance in 2023 – and chair tenure (provision 19);
  • whilst there have been improvements in how companies report on their application of the Code Principles, the FRC encourages companies to move away from a formulaic Principle by Principle approach (which it says simply adds to the length of the annual report and contains little company specific information), and instead to report clearly and concisely on how application of the Principles has made a difference to actions taken by their boards; and
  • investors, and proxy advisors should not favour strict compliance with the Provisions of the Code but focus on individual company circumstances and the explanations companies provide for their non-compliance, recognising that strict adherence with the Code’s detailed provisions may not be the right approach for every company.

Helpfully the review cites specific examples of companies which the FRC say demonstrate particularly good quality reporting in certain areas, such as reporting on risk management procedures and shareholder engagement, meaningful explanations for non-compliance, and culture and purpose reporting.

 

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Greg Mulley
Greg Mulley
+44 20 7466 2771

Caroline Rae
Caroline Rae
+44 20 7466 2916