Corporate reporting – BEIS consultation on climate-related disclosures by publicly quoted companies, large private companies and LLPs

The Department for Business, Energy and Industrial Strategy (BEIS) has launched a consultation on mandatory climate-related disclosures by publicly quoted companies, large private companies and limited liability partnerships (LLPs).

Context of the proposed mandatory disclosure requirements

The UK Government aims under its 2019 Green Finance Strategy for all listed companies and large asset owners to make disclosures in line with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations by 2022. Entities are currently encouraged to disclose against the TCFD recommendations on a voluntary basis. The number of disclosures remains low – which BEIS attributes to their voluntary nature – so the current consultation is assessing whether to make these disclosures mandatory.

BEIS considers that by making the disclosures mandatory, it will significantly increase the number of entities taking action in respect to climate-related risks and opportunities. BEIS’s other aim is to ensure that investors have access to climate-related information which can help them understand and manage their own climate-related financial risks.

Companies with a premium listing are already subject to relatively new TCFD-related disclosure obligations under the Listing Rules. With effect for financial periods starting on or after 1 January 2021, the FCA introduced a new Listing Rule which requires companies with a premium listing to include a compliance statement in their annual financial report, stating whether they have made disclosures consistent with the TCFD recommendations and recommended disclosures, or provide an explanation as to why they have not done so – for further details, see our client briefing here. BEIS intends the proposed new rules to be complementary to the FCA’s rules.

Companies and LLPs in scope

The consultation paper proposes that the disclosure requirements would apply to:

  • UK companies that are currently required to produce a non-financial information statement (that is, companies with more than 500 employees which are listed, or are banking or insurance companies);
  • AIM companies with more than 500 employees; and
  • other companies and LLPs which have more than 500 employees and a turnover of more than £500 million.

These companies will be required to report climate-related financial information in the non-financial information statement which forms part of their strategic report. LLPs will be required to publish the disclosures either in their strategic report, or in the carbon report in their annual report.

The disclosure requirements

For accounting periods starting on or after 6 April 2022, companies that are in scope will be required to include climate-related financial disclosures in annual reports under the four key pillars of the TCFD recommendations:

  1. Governance: disclose descriptions of the governance arrangements in place to identify and manage risks and opportunities from climate change, including who has operational responsibility for this, their experience, and, if applicable, whether the entity’s audit committee considers climate change.
  2. Strategy: disclose the entity’s business models and strategies, as well as a description as to how these may change in response to the effects of climate change.
  3. Risk Management: disclose descriptions of the principal risks and opportunities that the entity may face as a result of climate change, as well as how the entity manages those areas of risk. This may include a description of the risk management policies implemented to address climate change-related risks, and a description of the outcome of any such policies.
  4. Metrics and Targets: disclose descriptions of the key performance indicators (KPIs) relevant to the entity’s exposure to climate change risks and opportunities. Disclosure of targets for these KPIs would also be required.

The proposed new disclosure obligations are arguably less stringent than the rules for premium listed companies under the Listing Rules, as the proposed rules do not require or prescribe the disclosure of climate-related financial information in line with the 11 more detailed TCFD recommended disclosures. BEIS states that this is because it considers these to be at a level of granularity inconsistent with current legislative requirements of the strategic report. BEIS says that the focus on the TCFD pillars is particularly aimed at driving disclosure under the ‘Strategy’ heading, given that the percentage of companies currently disclosing under this pillar is significantly lower than under any of the other pillars.

Next steps

The consultation closes on 5 May 2021. The legislation to introduce the new disclosure requirements will be introduced when parliamentary times allows – BEIS aims to have drafted regulations implementing these new requirements by the end of 2021, with a view to them coming into force on 6 April 2022. The regulations would then be applicable for accounting periods starting on or after that date.

 

Jannis Bille
Jannis Bille
+44 20 7466 6314

Silke Goldberg
Silke Goldberg
+44 20 7466 2612

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Audit reform and corporate governance – consultation paper on audit and corporate governance reform

The Department of Business, Energy and Industrial Strategy has today published its long awaited consultation paper on audit and governance reform, Restoring trust in audit and corporate governance.

The consultation paper follows three separate reviews into audit and the audit market over the last few years:

Together, these reviews made over 150 recommendations for reform. The consultation paper states that the government is planning to takes forward the vast majority of the recommendations.

Audit reform

Under the government’s proposals:

  • Director accountability – The Audit, Reporting and Governance Authority (ARGA), the successor regulator to the FRC, will have power to sanction directors of all large companies for breach of their duties under the Companies Act 2006 in respect of reports and accounts, including the duty to approve accounts only if they give a true and fair view, and the duty to provide information to auditors.
  • Audit process – There will be new reporting obligations on both auditors and directors around internal controls and detecting/preventing fraud. It is consulting on different options, including a regime similar in scope to the US’s Sarbanes-Oxley Act on auditor assurance on internal controls.
  • Annual accounts – The current mandatory going concern statement and viability statement will be replaced with a ‘resilience statement’, requiring directors to focus their minds on short term survival, medium term reliance and long term threats to resilience.
  • Audit market – In order to increase the number of firms participating in the audit market, FTSE 350 companies will be required to use a smaller “challenger” firm to conduct a meaningful portion of their annual audit (e.g. one or more subsidiaries would be audited solely by a challenger firm), referred to as a managed shared audit.

Corporate governance proposals

The consultation paper also proposes a wider range of governance reforms, including in relation to:

  • Executive pay – Under the UK Corporate Governance Code, listed companies will be expected to be able to recover bonuses or share awards from executive directors if they have failed to protect customers’ and employees’ interests; and
  • Dividends – Directors will be required to make a formal statement about the legality and affordability of any proposed dividend.
    The consultation period will close on 8 July 2021. Subject to the outcome of the consultation, the government will bring forward primary legislation to implement the proposed reforms when parliamentary time allows.

We will publish a fuller briefing on the detailed proposals in due course.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Ben Ward
Ben Ward
+44 20 7466 2093

FRC report on improving “comply or explain” reporting

The Financial Reporting Council (FRC) has published a report on improving the quality of “comply or explain” reporting under the UK Corporate Governance Code.

Where companies do not comply with a provision in the Code, they are required under the Listing Rules to disclose that and give the reasons for non-compliance (LR 9.8.6(6)). In its Annual Review of the UK Corporate Governance Code (see our blog post here), the FRC found that an unexpectedly high number of companies in its sample claimed full compliance with the Code but could not demonstrate this in their reports.

The report states that companies should be clear about the provisions of the Code that they have departed from during the year in review and make this information easily accessible in the annual report. They should also include a full and comprehensive explanation for non-compliance that shows that an alternative arrangement is more appropriate and beneficial in upholding high standards of governance. In particular, a good explanation should:

  • set the context and background;
  • give a convincing rationale for the approach being taken;
  • consider any risks and describe any mitigating actions; and
  • set out when the company intends to comply with the provision.

The report also sets out the FRC’s expectations in relation to compliance with a number of specific provisions of the Code, including those relating to stakeholder interests and workforce engagement (provision 5), the chair’s tenure (provision 19), the work of committees (provisions 23, 26 and 41), and a number of remuneration-related provisions including post-employment shareholdings (provision 36), pensions-alignment (provision 38) and engagement with shareholders and the workforce (provisions 40 and 41).

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Ben Ward
Ben Ward
+44 20 7466 2093

FCA and FRC statement on reporting deadlines

The Financial Conduct Authority (FCA) and Financial Reporting Council (FRC) have published a joint statement reminding issuers of the temporary relaxations to the usual timeframes for publication of the annual report and accounts in light of the ongoing Covid-19 pandemic.

Under the relaxations, issuers have an additional two months to finalise their annual report and accounts (so they must be published within six months of their year-end). In relation to half-yearly reports, the period for publication is effectively extended by one month, so the half-yearly report must be published within four months after the end of the half-year. The FCA has said that these temporary relaxations will, at a minimum, continue to be available to listed companies with financial periods ending before April 2021.

The statement also reiterates the importance of keeping the market up to date and that listed companies must continue to assess carefully what information constitutes inside information, recognising that the Covid-19 pandemic and policy responses to it may alter the nature of information that is material to a business’s prospects.

The London Stock Exchange has also published an edition of Inside Aim, confirming that temporary measures for reporting deadlines in relation to the publication of annual results and half-yearly reports for AIM companies also remain available.

Alex Kay
Alex Kay
+44 20 7466 2447

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Robert Moore
Robert Moore
+44 20 7466 2918

Investment Association statement on shareholder priorities

The Investment Association (IA) has published a document discussing its listed company shareholder priorities for 2021.

The IA first published its shareholder priorities in January 2020. It focused on four key areas: climate change, audit quality, stakeholder engagement and employee voice and diversity (see our earlier blog post). The 2021 priorities document provides insights into the progress made by companies on these issues in 2020 and investors’ expectations for 2021. It also sets out how the Institutional Voting Information Service (IVIS), which is part of the IA, will analyse these issues for companies with year-ends on or after 31 December 2020.

  • Climate change – All companies in a high-risk sector (being financials, energy, transportation, materials and buildings, and agriculture, food and forest products) that do not address all four pillars of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) (being governance, risk management, strategy, and metrics and targets) will receive an amber top from IVIS. IVIS will also highlight to investors those FTSE companies that include a statement in their annual report that the directors have considered the relevance of material climate-related matters when preparing and signing off the company’s accounts.
  • Audit quality – The IA says that the quality and robustness of the audit is essential for investors but notes that, in practice, audit committee reports do not adequately demonstrate how the audit committee has challenged management’s judgments and do not describe how the audit committee has assessed the quality of the audit. IVIS will continue to focus on these issues in 2021.
  • Stakeholder engagement and employee voice – The IA notes that the Covid-19 pandemic has significantly impacted companies and their stakeholders. It says that investors expect companies to make quality disclosures outlining the approach taken to engaging, communicating and supporting the company’s stakeholders during the disruption caused by the pandemic and that this should include how the board reflected the views of their stakeholders in key decision making.
  • Diversity – IVIS will issue an amber top to any FTSE 350 companies that do not disclose either the ethnic diversity of their board or a credible action plan to achieve the Parker Review targets (see our earlier blog post). IVIS will also issue a red top to any FTSE 350 company that has female representation of 30% or less on their board, or female representation of 25% or less in their Executive Committee and its direct reports. FTSE Small Cap companies will receive an amber top in those circumstances.

 

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Alex Kay
Alex Kay
+44 20 7466 2447

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Guidance on European Single Electronic Format for annual reports

The FCA has published guidance on the requirement for listed companies to publish accounts in the European Single Electronic Format (ESEF) and the Department for Business, Energy and Industrial Strategy (BEIS) has updated its policy paper on ESEF.

Under DTR 4.1.14, issuers will have to publish their annual reports in the ESEF (see our earlier blog post). The FCA recently confirmed that the ESEF requirements that were due to become effective for financial years beginning on or after 1 January 2020 would instead become effective for financial years beginning on or after 1 January 2021 (see our earlier blog post).

FCA guidance

The FCA has published guidance for the preparation of annual reports in European single electronic format.

The guidance says that issuers should have regard to the ESEF reporting manual published by ESMA when preparing their reports in ESEF. It also sets out a small number of specific departures to the approach outlined in ESMA’s manual for UK issuers.

The FCA has confirmed that issuers will be able to voluntarily submit their annual report to the National Storage Mechanism (NSM) in ESEF from January 2021. The FCA’s ESEF webpage contains further information about the process for filing reports in ESEF.

Government guidance on auditor involvement

BEIS has updated its policy paper on ESEF to set out its view on the role of auditors. The Government first published the policy statement in June 2020 to set out its view on directors’ sign-off of accounts (see our earlier blog post).

The updated policy paper confirms that the Government will not require auditors to report on ESEF tagging of accounts at present but will consider this in the context of the recommendations on audit made by Sir Donald Brydon (see our earlier blog post).

The policy paper also notes that companies may wish to obtain assurance in relation to the preparation of accounts in accordance with the ESEF requirements in accordance with the Financial Reporting Council’s new ISAE 3000 standard.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Greg Mulley
Greg Mulley
+44 20 7466 2771

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Covid-19: FRC consolidated guidance and extension of insolvency restrictions

The Financial Reporting Council (FRC) has published a consolidated and updated edition of its guidance for companies on corporate governance and reporting in light of Covid-19 and the Government has extended the temporary restrictions on winding up petitions.

FRC guidance

The new FRC guidance note incorporates and supersedes the guidance published by the FRC in March (see our earlier blog post) and May 2020 (see our earlier blog post).

Additional commentary contained in the new guidance note includes:

  • Timing of publication of annual reports and accounts – The FRC encourages companies to make use of the extensions to the deadlines for the publication of the annual report and accounts. It notes that the FCA recently confirmed that listed companies with a year end up to and including 31 April 2021 will still have six (rather than four) months to publish their annual report and accounts (see our earlier blog post).
  • Strategic report – The FRC notes that stakeholders are interested in how business models and strategies have evolved in response to the pandemic and, in particular, how companies intend to navigate the short and medium-term uncertainty posed as a result of Covid-19.
  • Risk management and internal controls – The guidance notes that the risk of fraud may be elevated, given the changes to systems and procedures in light of Covid-19, and that boards should be alert to this risk.

The FRC has also published a consolidated and updated edition of its guidance for auditors in light of Covid-19.

Extension of insolvency restrictions

The temporary restrictions on winding up petitions that were introduced by the Corporate Insolvency and Governance Act 2020 (CIGA) have been extended until 31 March 2021.

The CIGA introduced restrictions on winding up petitions being presented if they were based on statutory demands dated between 1 March 2020 to 30 September 2020 (see our corporate update 2020/14). The restrictions were extended to 31 December 2020 in October (see our earlier blog post), and the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No.2) Regulations 2020 have now extended the restrictions again until 31 March 2021.

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Greg Mulley
Greg Mulley
+44 20 7466 2771

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Delay to implementation of European Single Electronic Format for annual reports

The FCA has published policy statement (PS20/14) which confirms that it intends to delay the introduction of the European Single Electronic Format (ESEF) requirements for annual reports in the UK. The delay is contingent on the Brexit transition period ending on 31 December 2020, as it is only once the transition period ends that the FCA is able to delay implementation.

Under the amended EU Transparency Directive, annual financial reports of companies which have securities listed on an EU regulated market must be published in accordance with the requirements of the ESEF for financial years beginning on or after 1 January 2020. The FCA introduced DTR4.1.14 in the Transparency Rules to implement this requirement (see our blog post at the time).

In July 2020, in light of the Covid-19 pandemic, the FCA published a consultation paper (CP20/12) containing proposals to postpone the entry into force of the ESEF requirements (see our blog post at the time).

The policy statement confirms that issuers will be required to:

  • publish their annual reports in XHTML web browser format with effect from financial years beginning on or after 1 January 2021 (rather than 2020); and
  • electronically tag their financial statements (if they produce consolidated annual financial statements in accordance with IFRS) with effect from financial years beginning on or after 1 January 2021 (rather than 2020); and
  • electronically tag the notes to financial statements (if they produce consolidated annual financial statements in accordance with IFRS) for financial years beginning on or after 1 January 2022. Although the FCA consulted on delaying this requirement by a year in its consultation paper, the policy statement confirms that this requirement will come into force with effect from January 2022 as originally envisaged.

The National Storage Mechanism (NSM) is being upgraded to allow issuers to submit annual reports in accordance with the ESEF requirements. Issuers will be able to voluntarily submit their annual report to the NSM in ESEF format from January 2021.

 

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Ben Ward
Ben Ward
+44 20 7466 2093

FRC expectations for corporate reporting for 2020/21

The Financial Reporting Council (FRC) has published its annual letter to audit committee chairs and finance directors on key developments and areas for improvement that listed companies should consider when preparing their next annual report and accounts.

Key points discussed in the letter include:

  • 2020 year-end reporting environment – The letter notes that the annual report in 2021 will be published against a backdrop of uncertainties, including as a result of the ongoing Covid-19 pandemic and the UK’s exit from the European Union. As such, the FRC encourages companies to consider carefully whether they should lengthen their reporting timetables for 2021, making use of the extensions to reporting deadlines announced by the FCA (see item 1 above). The letter discusses how companies should approach reporting in light of Covid-19 and refers companies to the FRC and FRC Lab’s previous publications on Covid-19 issues, including the FRC Lab’s recent update reports on Resources, action, the future and Going concern, risk, and viability (see our recent blog post). The letter also confirms the FRC’s expectation that all UK companies that use Alternative Performance Measures (APMs) in their annual reports continue to apply the ESMA Guidelines on APMs, notwithstanding the UK’s exit from the European Union.
  • Section 172 statements – Following a review of section 172 statements, the FRC says that many companies did not sufficiently explain how their directors discharged their section 172 duty, and in particular how they had regard to the consequences of decisions in the long term. In relation to stakeholder engagement, the letter notes that many companies did not explain how feedback from stakeholders affected the board’s decision making. The FRC says that it expects companies to improve their section 172 statements by discussing how employee-related issues and concerns are elevated to the board; the basis on which views are promoted to board discussion; direct actions arising from board discussions; and how the company relays its decisions on feedback provided by its workforce activities. The letter also refers companies to the FRC Lab’s recent infographic on section 172 statements (see our recent blog post).
  • Insights from thematic reviews – The letter discusses the key insights and observations from the FRC’s recent thematic reviews on climate change (see item 4 below), cash flow and liquidity, IFRS 15 (Revenue from contracts with customers) and IFRS 16 (leases).

 

Barnaby Hinnigan
Barnaby Hinnigan
+44 20 7466 2816

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

FRC annual review of corporate reporting for 2019/20

The Financial Reporting Council (FRC) has published its annual review of corporate reporting for 2019/2020.

The Review sets out the FRC Corporate Reporting Review team’s key findings following its review of annual reports and accounts for reporting periods to 31 October 2019.

In relation to narrative reporting, the FRC says that the topics most often raised with companies when reviewing annual reports include:

  • Strategic reports – Issues that the Review highlights that could be improved are the comprehensiveness of the strategic report and whether it gives a fair review. Other areas for improvement include ensuring non-financial information reporting requirements are appropriately addressed and ensuring that the principal risks and uncertainties do not omit risks that merit inclusion (for example, climate change).
  • Alternative performance measures (APMs) – Issues commonly raised include in relation to reconciliations, prominence and consistency. The Review also notes that the FRC expects issuers to continue to follow the ESMA Guidelines on APMs after the end of the Brexit transition period.

The FRC says that the topics most often raised with companies in the context of financial statements include issues in relation to judgements and estimates; impairment; revenue from contracts with customers; use of financial instruments; cash flow statements; provisions and contingencies; fair value measurement and business combinations.

In relation to the FRC’s monitoring priorities for the 2020/2021, it says that these are risks, judgements and uncertainties in light of the ongoing Covid-19 pandemic, the potential consequences of the UK’s exit from the EU, and climate-related risks.

 

Caroline Rae
Caroline Rae
+44 20 7466 2916

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Ben Ward
Ben Ward
+44 20 7466 2093