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

FRC Lab report on section 172 statements

The FRC’s Financial Reporting Lab has published a guidance note on section 172 statements.

The Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860) introduced a range of stakeholder reporting measures, including a requirement for certain companies to include in their strategic report a statement that describes how the directors of the company have had regard to the matters set out in section 172(1)(a) to (f) of the Companies Act 2006 when performing their duty under section 172 (see our briefing for further detail).

The FRC Lab guidance note seeks to help companies consider what content to include in a section 172 statement, how to present it and how to facilitate the process of preparing the statement.

Key points discussed in the guidance note include:

  • Content – The statement should explain why particular stakeholders are considered to be key; why particular engagement methods were effective; and the key decisions and planned actions in light of engagement and feedback. There should be appropriate linking to the company’s strategy and business model. The report also says that the statement should include discussion of the board’s oversight of stakeholder engagement.
  • Presentation – The statement should be clearly labelled, and cross-refer to further detail in other parts of the annual report. Case studies of significant decisions taken during the year are also helpful.
  • Process – Board agendas and board papers can be used to include helpful prompts on stakeholder-related issues.

 

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Alex Kay
Alex Kay
+44 20 7466 2447

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

COVID-19 – latest developments for corporate practitioners

In light of the widespread impact of COVID-19, various pieces of guidance have been published which companies should be aware of.

Company meetings and other corporate actions

  • Dividends – The London Stock Exchange (LSE) has published guidance in Market Notice N07/20 on payment dates under the 2020 Dividend Procedure Timetable. The Dividend Procedure Timetable says that issuers should pay cash dividends within 30 business days of the record date. However, from 25 March 2020, the LSE will permit a deferral period of up to 30 business days for payment of a dividend, but to no more than 60 business days after the record date. An issuer must notify the LSE of any deferral of a dividend payment without delay. After the deferral period has expired, the dividend must either be paid or cancelled. Issues to consider around the payment of dividends are also discussed in the FRC guidance referred to in the corporate reporting section below.
  • Company meetings – The Government has announced that it will introduce legislation to ensure that companies required by law to hold annual general meetings (AGMs) will be able to do so in light of the restrictions on movement and gatherings. It says that companies will be given greater flexibility to hold AGMs online or to postpone the meetings but the detailed provisions are not yet available. ICSA: The Chartered Governance Institute has published an updated version of its guidance on holding AGMs and guidance on virtual board meetings.
  • Proposed changes to insolvency law – The Government has announced that it will introduce a number of proposed changes to UK insolvency law in response to COVID-19. Whilst the detail of the changes is not yet available, the announcement indicates that they will enable companies undergoing a rescue or restructure process to continue trading, giving them breathing space that could help them avoid insolvency. They will also enable companies to continue buying supplies and will temporarily suspend wrongful trading provisions retrospectively from 1 March 2020. Our restructuring, turnaround and insolvency team has published a briefing on what form the changes may take.
  • Share issues – The Pre-Emption Group has published a statement recommending that investors consider supporting, on a case by case basis, issuances by companies of up to 20% of their issued share capital (rather than the usual 5% for general corporate purposes, plus an additional 5% for acquisitions, that it usually recommends). The statement indicates that this is only a temporary relaxation and sets out steps for companies seeking to take advantage of this flexibility. For further information, see this briefing published by our ECM team.
  • Stock transfer forms – HM Revenue & Customs (HMRC) has published details of a new process for stock transfer forms and payment of stamp duty, in light of COVID-19. Stock transfer forms should no longer be posted to HMRC but instead an electronic copy (e.g. a scanned PDF) of the stock transfer form, or in the case of purchase of own shares of Form SH03, should be emailed to HMRC. HMRC also says that it will accept e-signatures while COVID-19 measures are in place and that stamp duty must be paid before HMRC can process the form.

Corporate reporting

  • Listed company annual report and accounts – The Financial Conduct Authority (FCA) has published a statement which, in effect, gives listed companies an additional two months to finalise their annual report and accounts as the FCA says that it will not suspend the listing of companies if they publish financial statements within six months of their year-end. The Q&A to accompany the FCA statement confirms that the FCA statement does not currently extend to half yearly financial reports. The FCA has published an updated version of its Primary Market Bulletin No. 27 to reflect this (see our blog post for more information on PMB No. 27).
  • AIM company accounts – The LSE has said that AIM companies can apply for a three-month extension to the deadline for publication of their annual accounts.
  • Filing accounts at Companies House – Companies House has said that it will grant a three month extension for companies to file their accounts. Companies must apply for the extension but those citing issues around COVID-19 will be automatically and immediately granted an extension.
  • FRC guidance for companies preparing financial statements – The Financial Reporting Council (FRC) has published guidance for companies preparing financial statements. It highlights some key areas for boards in maintaining strong corporate governance as well as providing high-level guidance on preparation of annual reports and other corporate reporting matters.
  • Gender pay gap reporting – The Government has suspended enforcement of the gender pay gap deadlines for this reporting year (2019/20) and there will be no expectation on employers to report their data.
  • Preliminary results announcements – The FCA has asked listed companies to delay announcement of their preliminary results for a period of two weeks. Further details on the moratorium, which is voluntary, can be found in a Q&A published alongside the FCA statement.

For further information, see this post on our Corporate Notes blog.

Other relevant developments

  • Managing liquidity – As both economic production and consumption contract rapidly, many businesses are facing cash flow difficulties. We have published a briefing in which we consider options open to companies to help manage liquidity.
  • Job retention scheme – HMRC has published more details on the Coronavirus Job Retention Scheme. Our employment team has published a briefing on the new guidance.

For further information on these and other COVID-19 related issues, see our COVID-19 Hub and sign up for our Global Webinar Series.

Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Antonia Kirkby
Antonia Kirkby
+44 20 7466 2700

Gavin Williams
Gavin Williams
+44 20 7466 2153

Investment Association statement on shareholder priorities

The Investment Association (IA) has published a document discussing Listed company shareholder priorities for 2020. It focuses on four areas that IA members consider to be key drivers to long-term value. It also discusses the approach that IVIS, the IA’s corporate governance research service, will take in these areas when highlighting issues relevant to shareholders exercising their votes.

The four areas of focus are:

  • Climate change – The IA says that investors are looking for significant progress from listed companies in implementing the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations (see our corporate update 2017/14).  IVIS will introduce a new section to its ESG report (on environmental, social and governance issues), highlighting to investors whether a company has made climate change-related disclosures.
  • Audit quality – The document notes that the quality and robustness of the audit is essential for investors but that, in practice, audit committee disclosures are often generic. The IA says that audit committee reports need to properly disclose where challenges have been raised, how professional scepticism has been applied and how a quality audit has been delivered. IVIS will revise its questions to encourage better disclosures around audit.
  • Stakeholder engagement and employee voice – The IA says that investors are keen to better understand how directors are fulfilling their duties and taking account of the views of the company’s material stakeholders. IVIS will introduce two new questions to ascertain whether the board has identified a company’s material stakeholders and its engagement with them, and which of the four options for workforce engagement outlined in the Corporate Governance Code a company has adopted.
  • Diversity – The IA notes the progress that has been made in relation to gender diversity on boards in light of the Hampton-Alexander Review. It also notes that investors expect companies to place  greater emphasis on ethnic diversity, in particular in light of the Parker Review (see item 1 above). The IA says that IVIS will red top any FTSE 350 company where:
    • women represent 20% or less of the board;
    • there is one or less women on the board (unless the one third target is achieved i.e. a board of three directors); or
    • women represent 20% or less of the Executive Committees and their direct reports.

For FTSE Small Cap companies, IVIS will amber top any company where women represent 25% or less of the Board; there is one or less women on the Board (unless the one third target is achieved); or women represent 25% or less of the Executive Committees and their direct reports.

Alex Kay
Alex Kay
+44 20 7466 2447

Caroline Rae
Caroline Rae
+44 20 7466 2916

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

FRC annual review of corporate reporting and developments for 2019/20 annual reports

The Financial Reporting Council (FRC) published its annual review of corporate reporting for 2018/2019 in October 2019. It also published a letter to audit committee chairs and finance directors on key developments and areas of improvement that listed companies should consider when preparing their next annual report and accounts.

Annual review of corporate reporting

Topics covered in the report include:

  • Strategic reports – The FRC frequently challenges the adequacy of disclosures around principal risks and uncertainties.
  • Non-financial information statements – The Companies Act 2006 requires large “public interest entities” (including listed companies) to set out prescribed non-financial information in their strategic reports. The FRC highlighted that disclosures are often generic and do not identify a company’s policies in these areas, the outcomes of those policies or the due diligence carried out in relation to them.
  • Dividends – The FRC continues to challenge companies that pay interim dividends in excess of the distributable reserves shown in the last published accounts.

2019/20 annual reports

The FRC’s letter to audit committee chairs and finance directors provides guidance on the key developments and areas of improvement that listed companies should consider when preparing their next annual report and accounts.

Key points from the FRC’s letter include:

  • Section 172 statements – The FRC encourages boards to make specific disclosures, in the context of directors having regard to the matters set out in section 172(1) Companies Act 2006 when performing their section 172 duty, including issues, factors and stakeholders they consider relevant, the main methods used to engage with stakeholders and information on the effect of this on the company’s decisions and strategies.
  • Environmental disclosures – Companies should be reporting on the direct and indirect effects of climate change on their business. Disclosures should discuss actions the board has taken to account for resilience of the company’s business model as well as its risks, uncertainties and viability in the immediate and longer term, in light of climate change.
Sarah Hawes
Sarah Hawes
+44 20 7466 2953

Greg Mulley
Greg Mulley
+44 20 7466 2771

Gareth Sykes
Gareth Sykes
+44 20 7466 7631

Caroline Rae
Caroline Rae
+44 20 7466 2916

Ben Ward
Ben Ward
+44 20 7466 2093

Stephen Wilkinson
Stephen Wilkinson
+44 20 7466 2038