Corporate governance – Glass Lewis overview of Say on Climate votes

Glass Lewis has published a paper setting out its views on Say on Climate votes.

The paper notes that “Say On Climate” votes, where listed company shareholders are given the opportunity to vote on climate-related proposals, are becoming an increasingly important part of the 2021 annual general meeting season. Both boards and shareholders are putting forward proposals for votes on climate-related matters.

Glass Lewis acknowledges that there are many positive aspects to Say On Climate resolutions but that they also present a number of challenges for investors and companies, particularly if the resolution relates to a company’s strategy or plans. It notes that, whilst many investors are supportive of such resolutions, views in the investor community are mixed.

Glass Lewis distinguishes between proposals that involve additional disclosure by companies, which it strongly supports, and those that offer a shareholder vote on a climate plan or strategy. It says it will generally recommend against management and shareholder proposals requesting that companies adopt a policy that provides shareholders with an annual vote on a climate-related plan or strategy.

On other proposals, Glass Lewis states that given their broad variety, and the lack of standardisation on how shareholders should evaluate these resolutions before voting, it will review each resolution on a case-by-case basis. The paper gives examples of various climate-related resolutions proposed to date and also provides examples of best practice disclosures in support of such resolutions.

Glass Lewis intends to codify its approach in advance of the 2022 AGM season, following investor, corporate and stakeholder engagement.

 

Silke Goldberg
Silke Goldberg
+44 20 7466 2612

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

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

Corporate governance – PLSA Stewardship Guide and Voting Guidelines 2021

The Pensions and Lifetime Savings Association (PLSA) has issued its Stewardship Guide and Voting Guidelines for 2021. The document sets out the PLSA’s views on current market best practice and its voting recommendations for AGMs in 2021.

The key changes contained in the 2021 Guidelines are:

  • Virtual shareholder meetings – The Guidelines state that, in light of concerns that virtual shareholder meetings may reduce investor engagement, the PLSA would recommend voting against a proposal to allow virtual shareholder meetings, unless the proposal is time limited.
  • Executive remuneration – The Guidelines state that maximum pay-outs to executives must remain in line with the expectations of shareholders and other stakeholders and should take into account the impact of Covid-19, any taxpayer-funded support that the company has received from government and the treatment of the wider workforce.
  • Climate-related reporting – As the largest pension schemes will likely be required to report in line with the recommendations of the Taskforce for Climate Related Financial Disclosures (TCFD) from October 2021, there is increasing focus on listed company disclosures in relation to climate change and TCFD-aligned reporting.

The Guidance also incorporates the PLSA’s voting recommendations summary chart, which sets out its voting recommendations on certain issues including executive remuneration, audit, company leadership and dividends.

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Greg Mulley
Greg Mulley
+44 20 7466 2771

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Mandatory climate-related reporting briefing

Our latest briefing looks at the climate-related reporting regime that will apply to all premium listed companies from 2022. These companies will have to report in line with the Task Force on Climate-related Financial Disclosures’ (TCFD) Recommendations and the TCFD Recommended Disclosures on a comply or explain basis.

Our briefing looks at the nature of these disclosures, how they relate to existing climate-related reporting, and what premium listed companies should be doing now to prepare for them.

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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

Climate change – Final FCA rules on climate change-related financial disclosures

The Financial Conduct Authority (FCA) has today published a Policy Statement (PS20/17) and final rules and guidance in relation to climate-related financial disclosures for UK premium listed companies.

Companies will be required to include a statement in their annual financial report which sets out whether their disclosures are consistent with the Task Force on Climate-related Financial Disclosures (TCFD) June 2017 recommendations, and to explain if they have not done so. The rule will apply for accounting periods beginning on or after 1 January 2021.

The FCA has made only one material change to the rules consulted upon in March 2020 (CP20/03) and has added some additional guidance:

  • Timeframe for future compliance – Where companies are explaining why they have not made disclosures consistent with the TCFD recommendations, the final rules state that they must explain any steps they are taking or plan to take in order to be able to make the disclosures in the future, and the timeframe within which they expect to be able to make those disclosures (LR 9.8.6(8)(b)(ii)(C) R).
  • Level of detail required – The FCA has added additional guidance on the limited circumstances in which it would expect issuers to explain rather than disclose – where they face “transitional challenges” – and in relation to the level of detail to be included in companies’ disclosures (LR 9.8.6(D) and (E) G). It states it expects all companies will “ordinarily be able” to make TCFD consistent disclosures on governance and risk management.
  • References to TCFD materials – The FCA has added guidance to clarify that a company’s determination of consistency with the TCFD’s recommendations should be informed by a detailed assessment of their disclosures which takes into account certain specified TCFD materials (LR 9.8.6(B) and (C) G).

The FCA has also issued a Technical Note clarifying existing environmental, social and governance (ESG) disclosure obligations in its existing rules.

It has also confirmed this it aims to publish further consultation papers on extending the application of TCFD disclosures to a wider scope of listed issuers, and possibly strengthening the compliance basis, in early 2021.

Mike Flockhart
Mike Flockhart
+44 20 7466 2507

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

FRC thematic review on climate reporting

The FRC has published a thematic review on climate reporting.

The report follows a review by the FRC into climate-related issues as they affect governance, reporting and audit, and the roles of a range of market participants. It sets out the FRC’s views on current market practice and expectations for the future.

The key findings in the report include:

  • Governance – The report considers how boards take into account climate-related challenges. It notes that, although more companies are disclosing their approach to climate governance, it is often unclear how consideration of climate-related issues informs key decisions or impacts business model and strategy. Investors are looking for boards to explain how they consider and assess climate-related matters.
  • Corporate reporting – Whilst many companies comply with the minimum reporting requirement in relation to climate issues, the report states that frequently this does not meet the needs of investors and other users of the annual report. In particular, the report notes that investors seek to understand the risks and opportunities presented by climate change, including their prioritisation, likelihood and impact, the timeframes over which they might crystallise and the resilience of the company’s business model and strategy. The report also notes that a growing number of companies report, or intend to report, against the Task Force on Climate-related Financial Disclosures (TCFD) framework. The FRC encourages the use of the TCFD framework but notes that these disclosures would benefit from greater detail in relation milestones, targets and metrics.
  • Auditors – The report discusses how auditors take into account climate-related issues. It concludes that auditors need to improve their consideration of climate-related risks when planning and executing their audits.

The report is accompanied by five further reports containing more detailed findings on each of the five themes contained in the report: how boards are taking into account climate-related challengeshow companies are developing their reporting on climate-related challengeswhat investors want to seehow auditors are taking into account climate-related challenges; and how professional bodies and regulators are taking account of climate change.

Gavin Davies
Gavin Davies
+44 20 7466 2170

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Greg Mulley
Greg Mulley
+44 20 7466 2771

Government proposals on mandatory climate-related reporting

The government has published a roadmap towards mandatory climate-related disclosures and a report from the UK’s joint Government-Regulator TCFD taskforce. These reports form part of the government’s green finance strategy.

The roadmap sets out an indicative path towards mandatory climate-related disclosures across the UK economy which are aligned with the recommendations of the TCFD. The proposals cover seven categories of organisation: listed commercial companies; UK-registered companies; banks and building societies; insurance companies; asset managers; life insurers and FCA-regulated pension schemes; and occupational pension schemes

The key implementation issues and timelines for corporates described in these reports include:

  • Listed companies – The reports confirm that the FCA intends to introduce new disclosure requirements based on the TCFD recommendations for premium listed companies. These requirements would apply on a “comply or explain” basis and will come into force for financial years beginning on or after 1 January 2021. The FCA consulted on this proposal in March 2020 (see our blog post at the time) and the reports state that the FCA aims to publish a policy statement by the end of 2020. The documents also note that the FCA intends to publish a further consultation paper in the first half of 2021 seeking views on making these disclosures mandatory (rather than “comply or explain”) and widening the scope of the requirements to other listed companies, including standard listed companies.
  • UK-registered companies – The reports state that the government intends to consult on measures which would require companies registered in the UK to make TCFD-aligned disclosures in their annual report and accounts. The government intends to consult on the proposals, including the companies that should be in scope, in early 2021 and for legislation to be passed implementing these changes by mid-2021.

 

Silke Goldberg
Silke Goldberg
+44 20 7466 2612

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Alan Montgomery
Alan Montgomery
+44 20 7466 2618

Climate change – FCA consultation on climate change-related financial disclosures, ISS Guidelines and EU report on corporate reporting

The Financial Conduct Authority (FCA) has issued a consultation paper (CP20/3) on proposals to improve climate change related financial disclosures by listed issuers. Institutional Shareholder Services (ISS) has published Climate Proxy Voting Guidelines and the European Financial Reporting Advisory Group (EFRAG) has published a report on climate change reporting by EU companies.

FCA consultation

The FCA is proposing to introduce a new disclosure requirement based on the Task Force on Climate-related Financial Disclosures (TCFD) June 2017 recommendations.

The requirement (new LR 9.8.(8)R), which would sit with the other annual financial report content requirements in the Listing Rules, would require premium listed companies to include in their annual report a statement setting out:

  • whether the company has included “disclosures consistent with the four recommendations and the eleven recommended disclosures set out in Section C of the TCFD Final Report” and, if so, where those disclosures can be found; or
  • where it has not done so, the reasons for not including such disclosures.

A new draft guidance note will accompany the rule changes.

The consultation paper says that the new requirements will come into force for financial years beginning on or after 1 January 2021. However the FCA has since announced that the closing date for the consultation has been delayed until 1 October 2020 (due to COVID-19) and so the date on which the changes take effect may also be delayed.

ISS Guidelines

The Climate Proxy Voting Guidelines published by ISS are based on principles developed from international frameworks such as the TCFD’s disclosure requirements. The ISS uses a scorecard approach to reflect various climate-related risk factors and may recommend votes against the re-election of board members responsible for climate-related risk oversight or for failures to sufficiently oversee, manage, or guard against material climate change related risks.

Climate change reporting by EU companies

The EFRAG report on climate change reporting by EU companies concludes that, despite a general improvement in the quality of climate change disclosures since 2017, there is a major gap between companies’ reporting practices and users’ expectations.

The report examines corporate reporting against both the mandatory requirements of the Non-Financial Reporting Directive, and the voluntary requirements of the TCFD recommendations. In particular it found that:

  • there are varying levels of awareness and engagement amongst companies. Reporting is better in larger companies, and those in carbon-intensive and financial sectors; and
  • whilst reporting on climate-related policies is generally good, there is more limited reporting on the monitoring of policies and performance against them.

The report recommends that companies avoid disclosure of generic information, and reporting without a materiality assessment. It also notes that there are few examples of companies that describe their board’s role in overseeing climate-related risks and opportunities.

Mike Flockhart
Mike Flockhart
+44 20 7466 2507

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700