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 – Supreme Court allows appeal relating to UK parent company duty of care

The UK Supreme Court handed down its judgment in a high profile jurisdictional challenge relating to group claims brought against Royal Dutch Shell Plc and its Nigerian subsidiary in connection with alleged pollution in the Niger Delta.

The claimants (some 42,500 individuals from the Niger Delta region) brought proceedings in the English courts against Royal Dutch Shell Plc (incorporated in England and Wales) and its subsidiary Shell Petroleum Development Company of Nigeria Ltd (SPDC). The claimants allege environmental damage resulting from the operations of a joint venture operated by SPDC in Nigeria. The claimants allege that Royal Dutch Shell Plc owed them a duty of care which arose from the significant control which it allegedly exercised over SPDC’s operations.

In a decision which will be of interest to all UK domiciled holding companies, the Supreme Court unanimously held that the English court does have jurisdiction to hear the claims. This means that the case can now proceed to a trial on the merits in the English court.

Our disputes team has published analysis of the Supreme Court’s decision on our Litigation Notes blog.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Stephen Wilkinson
Stephen Wilkinson
+44 20 7466 2038

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

Consultation on deforestation due diligence law

The UK government has published a consultation on a new law aimed at protecting rainforests and clamping down on illegal deforestation. The proposed law would introduce mandatory supply chain due diligence obligations and reporting in relation to ‘forest risk’ commodities.

The government’s announcement follows the recommendations set out in a March 2020 report prepared by the Global Resource Initiative taskforce, a group comprising business representatives and environmental groups which has been tasked with finding ways to reduce the climate and environment impacts of key UK supply chains.

Under the new law, it will be illegal for larger businesses to use forest risk commodities that have not been produced in accordance with local laws. Due diligence must be undertaken to ensure this is the case, and companies will be required to report on the steps taken. Those who do not comply would be subject to fines. Forest risk commodities are commodities that can cause wide-scale deforestation such as beef, cocoa, palm oil, rubber and soya.

The consultation closes on 5 October 2020.

Further discussion of the proposals is available here.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Greg Mulley
Greg Mulley
+44 20 7466 2771

Gavin Williams
Gavin Williams
+44 20 7466 2153

EU Taxonomy Regulation on criteria for assessing environmental sustainability

An EU Regulation on the establishment of a framework to facilitate sustainable investment entered into force on 12 July 2020. The Regulation sets out an EU-wide taxonomy, or set of criteria, for determining whether an economic activity qualifies as environmentally sustainable, and therefore the degree to which an investment is environmentally sustainable.

The Regulation forms part of the EU’s Action Plan on Sustainable Finance. If it is implemented in the UK following Brexit, it will, among other things, require UK listed companies to significantly enhance their disclosures in relation to the environmental sustainability of their activities. Companies will need to disclose: (i) the proportion of turnover derived from products/services associated with economic activities that qualify as environmentally sustainable; and (ii) the proportions of capital expenditure and operating expenditure related to assets or processes associated with economic activities that qualify as environmentally sustainable.

The Regulation is due to be implemented in stages. As businesses and financial market participants begin preparing for its implementation, we have published a detailed briefing on its scope and operation.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Greg Mulley
Greg Mulley
+44 20 7466 2771

Covid-19 – latest developments for corporate practitioners

Further guidance for companies has been published in light of the Covid-19 pandemic.

Company meetings

  • Shareholder meetings – Relaxations to the company meeting requirements contained in the Companies Act 2006 (as well as the meeting requirements for certain other entities) came into force on 26 June 2020. Under the relaxations, which were made by the Corporate Insolvency and Governance Act 2020, shareholder meetings can take place by electronic or any other means, notwithstanding the provisions contained in the Companies Act 2006 and the company’s articles of association. The participants need not be in the same place and shareholders do not have a right to attend in person. The relaxations apply to company meetings held between 26 March and 30 September 2020. ICSA: The Chartered Governance Institute and the City of London Law Society have published guidance on holding meetings under the Act. The guidance is available to members on The Chartered Governance Institute’s website.

Company filings

  • Temporary extension to filing deadlines The Companies etc. (Filing Requirements) (Temporary Modifications) Regulations 2020, which were made under the Corporate Insolvency and Governance Act 2020, temporarily extend various filing deadlines under the Companies Act 2006 and other legislation for companies and other entities, including:
    • Accounts: extended by three months, to 12 months for a private company and nine months for a public company. The extension, which is automatic, applies to the original filing deadline. It will not be added to any filing extension already granted by Companies House;
    • Confirmation statement: extended from 14 days to 42 days;
    • Events-driven filings (such as changes in details of directors): extended from 14 days to 42 days; and
    • Charges: extended from 21 days to 31 days.

The longer filing periods apply to filing deadlines that fall between 27 June 2020 and 5 April 2021 (inclusive). Companies House Guidance notes that the revised filing dates can be checked via the Companies House Service.

  • Extension of Companies House upload service – Companies House has extended its temporary upload service (see our corporate update 2020/13) to enable companies to file articles of association and related forms and resolutions online, rather than in paper format. The list of documents and forms which can now be uploaded using this service is available here.

Insolvency regime and directors’ duties

As well as relaxing the requirements for company meetings and allowing extensions to the filing deadlines for certain documents, as discussed above, the Corporate Insolvency and Governance Act 2020 has also made changes to the insolvency regime in the UK. The changes include:

  • Suspension of wrongful trading – When determining what contribution, if any, a director should make to a company’s assets following a finding of wrongful trading, the court must assume that a director is not responsible for any worsening of a company’s financial position between 1 March 2020 and 30 September 2020.
  • Ipso facto (termination) clauses – Contractual clauses permitting a supplier of most goods or services to terminate supply as a result of the customer’s entry into an insolvency procedure will cease to have effect.
  • Winding up petitions – Winding up petitions cannot be presented if based on statutory demands dated 1 March 2020 to 30 September 2020. Creditors will also be prevented from winding up a company unless the creditor has reasonable grounds to believe that Covid-19 has not had a financial effect on the company.
  • New company moratorium – A new moratorium is available for companies, which will give a company up to 40 business days of protection from creditors, without court or creditor approval. The moratorium prevents legal processes against the company, including commencing insolvency proceedings and crystallising a floating charge.
  • Restructuring plan – This new form of restructuring, similar to a scheme of arrangement, allows the court to impose a compromise on a company’s creditors and shareholders, including a cross-class cram-down.

We have previously published briefings on the impact for supply chains, landlords, banks and pension scheme trustees.

Other relevant materials

  • ESG – Corporate purpose and environmental, social and governance (ESG) issues dominated headlines in the months leading up to the Covid-19 outbreak. The intense public scrutiny of corporate conduct, governance and investment behaviours during the pandemic has served to accelerate the conversation around ESG issues. To help make sense of this new paradigm, we have published a guide in which we set out some of the ways in which Covid-19 is impacting the key ESG considerations confronting businesses, asset managers, asset owners and lenders.
  • Investment and acquisition opportunities – We expect the crisis to operate as a catalyst for change. As we transition to a new normal, there will be opportunities for those with access to capital and a desire to invest or participate in industry consolidation. In our latest guide we look at possible options and issues for those looking to invest.
  • Land Registry and electronic signatures – The Land Registry has issued draft practice guidance setting out the basis on which it will accept electronic signatures. The consultation closes on 18 July 2020 and the final practice note will be issued in the “next few weeks”.
  • Service of proceedings – The High Court has set aside default judgment obtained against a defendant Council where the claim form and particulars were posted to its offices shortly after the start of the Covid-19 lockdown. For further information, see our Litigation Notes blog post.

For further Covid-19 related publications, see our COVID-19 Hub.

Mark Bardell
Mark Bardell
+44 20 7466 2575

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

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