Ashurst Governance and Compliance Update - Issue 29
21 November 2022
IN THIS EDITION WE COVER THE FOLLOWING: |
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Audit & Corporate Governance Reforms 1. FRC consults on a new minimum standard for audit committees 2. FRC sets out principles for its 'public interest test' |
Climate-related reporting 3. UK Transition Plan Task Force publishes consultation on Disclosure Framework and Implementation Guidance 4. Centre for Climate Engagement launches Law and Climate Atlas |
AGMs in 2023 5. Glass Lewis publishes 2023 proxy voting policy guidelines |
Directors’ remuneration 6. IA publishes annual guidance on executive remuneration for 2023 |
EU narrative reporting 7. EU Parliament adopts Corporate Sustainability Reporting Directive |
Audit & Corporate Governance Reforms |
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1. FRC consults on a new minimum standard for audit committeesThe FRC has published a consultation on its draft proposal for a minimum standard for audit committees of UK incorporated, premium listed companies included in the FTSE 350 index. The consultation follows the government's response to its Restoring Trust in Audit and Corporate Governance White Paper, which set out its intention to give the FRC's successor body – the Audit, Reporting and Governance Authority (ARGA) - statutory powers to mandate minimum standards for audit committees. More detail on the government's response and proposed reforms can be found in AGC update, Issue 20; more detail on the work of the FRC as set out in its July Position Paper can be found in AGC update, Issue 22. The purpose of the standard is to increase performance across audit committees in the FTSE 350, ensuring a consistent approach and supporting a 'well-functioning audit market'. The FRC is now seeking the views of its stakeholders on the draft standard, particularly those of FTSE 350 companies. The standard focuses on the role of the committee as regards the external audit, specifically:
The standard should be read in conjunction with the UK Corporate Governance Code and the FRC Guidance on Audit Committees; it is not intended as a replacement. Audit committees should continue to follow the Code and associated guidance on a 'comply or explain' basis. Following the consultation, the plan is for the standard to be available to committees on a voluntary basis by the end of 2023, ahead of the planned legislation that will make the standard mandatory. Companies aspiring to join the FTSE 350 are encouraged to follow it on a voluntary basis. Even where a company has no plans to grow to that size, if it is subject to mandatory tendering and rotation of audit firm appointments, the FRC suggests that it may wish to apply the standard in any event. Comments on the standard should be submitted to the FRC by close of business on 8 February 2023. 2. FRC sets out the principles for 'public interest test' in its review workThe FRC has published a set of principles that it will use to assess whether the public interest is best served by carrying out regulatory, supervisory and enforcement work that is outside of its primary 'regulatory perimeter'. In the response to its White Paper on Restoring Trust in Audit and Corporate Governance, the government committed to expanding the definition of a public interest entity (PIE) to include companies with over 750 employees and a turnover of over £750m. The FRC expects that much of the scope of ARGA’s work will be determined by this new definition. However, the government also recognised there will be exceptional circumstances where ARGA should take regulatory action in areas of public interest that are not within this regulatory focus. The principles form the basis of the public interest considerations ARGA will take into account when determining whether it would be appropriate to act. Broadly, the principles focus on whether, taken together:
The FRC has committed to producing a yearly report explaining how its regulatory scope applies to each of its functions, highlighting where it has taken any decision to go beyond it. The principles themselves will be subject to periodic review. |
Climate-related reporting |
3. UK Transition Plan Task Force publishes consultation on Disclosure Framework and Implementation GuidanceThe UK Transition Plan Taskforce (TPT) has published for consultation a draft Disclosure Framework and Implementation Guidance which set out recommendations to support companies when preparing and disclosing climate transition plans. The TPT has also launched a 'Sandbox' for companies and financial institutions to help users and preparers create their own transition plans. By way of reminder, the TPT was announced by the government at COP26 to develop the gold standard for private sector climate transition plans. Current market contextCompanies are not currently required to publish a transition plan, albeit that it is an expectation of reporting against recommended TCFD disclosures. In short, the FCA's Listing Rules require in-scope listed companies to report against the TCFD recommendations and recommended disclosures, and similar TCFD-aligned disclosures are now required of a wider cohort of companies, including larger private companies, in the new 'non-financial and sustainability information statement' which must be located in their strategic report. Disclosure FrameworkThe Framework makes draft recommendations for companies and financial institutions on developing their climate transition plans. It emphasises the need for short-term action by companies and financial firms and a consideration of how to prepare for the economy-wide transition to net-zero. In summary, the TPT recommends that a good transition plan should address:
Implementation GuidanceThe Guidance sets out the steps to be taken in developing a transition plan, as well as when, where, and how to disclose it. Entities should publish standalone transition plans at least every three years, or sooner where significant changes are made to the plan. Progress on or amendments to plans should be reported annually as part of existing TCFD reporting or International Sustainability Standards Board-aligned disclosures in general purpose financial reporting. Transition plans must be clearly separate from other existing disclosure obligations or reports (i.e. presented as an appendix or separate document). Next stepsThe Framework and Guidance are open for public consultation until 28 February 2023. Feedback from the consultation and the Sandbox will then be used to finalise the Framework and Guidance which the FCA intends to draw on to strengthen its transition plan disclosure expectations for listed companies, asset managers, and regulated asset owners. The FCA will also consult at some point in the next two years on changes to the Listing Rules to reference the final ISSB standards, once adopted in the UK. Item contributed by Lorraine Johnston, Partner in our Financial Regulation team4. Centre for Climate Engagement launches Law and Climate AtlasAhead of COP27, the Centre for Climate Engagement at Hughes Hall, University of Cambridge has launched the Law and Climate Atlas – an online resource to help lawyers 'drive the transition to net zero'. The Atlas maps intersections between climate change and law to bring focus to how climate change impacts many different areas of law – and how each area, and those providing legal advice on them, can help to drive change. |
AGMs in 2023 |
5. Glass Lewis publishes 2023 proxy voting policy guidelinesGlass Lewis has published its 2023 proxy voting policy guidelines for the UK which set out its approach to assessing all topics on the annual general meeting agenda. This follows ISS's consultation on its own guidelines which we covered in AGC update, Issue 28. Changes from the 2022 Glass Lewis guidelines include:
Additional issues to note include:
Other clarifications to the guidelines include:
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Directors’ Remuneration |
6. IA publishes annual guidance on executive remuneration for 2023The Investment Association has published its annual updated Principles of Remuneration for 2023, as well as a letter to remuneration committee chairs. The letter highlights the IA's view of the principal issues of concern to investors which committees should consider, including the following:
There have not been any significant changes to the Principles of Remuneration themselves. However, there has been a minor update relating to non-executive director fees: the Principles set out investor support for non-executive directors to be paid fees which reflect the reality of time commitment, complexity and skillset required for their role. |
EU narrative reporting |
7. EU Parliament adopts Corporate Sustainability Reporting DirectiveOverviewThe EU Parliament has adopted the new Corporate Sustainability Reporting Directive (CSRD). CSRD will replace the Non-Financial Reporting Directive (NFRD) and lead to more extensive non-financial reporting requirements for a larger number of companies. Specifically, CSRD provides for more detailed disclosures regarding the impact of a company's business on environment, human rights and social standards. Disclosures will be subject to audit by the company's statutory auditor. The EU Commission adopted a first proposal for CSRD on 21 April 2021. The proposal was amended based on a provisional political agreement by the EU Council and the EU Parliament on 21 June 2022. A major change compared to the initial draft was the extension of the Directive's scope to include undertakings that are governed by the laws of a non-EU member state (including, therefore, the UK), and which generate a net turnover of more than EUR 150 million in the EU and have a subsidiary or branch in the EU. For more information on the proposals, please see Item 5 of AGC update, Issue 26. The adopted version of CSRD does not provide for substantial changes compared to the proposal as amended on 21 June 2022. Next stepsIt is expected that the European Council will approve Directive on 28 November 2022 in order that it can be published in the EU Official Journal and become effective at the beginning of 2023. EU member states must then transpose its provisions into national law with a view to the requirements having operative effect in 2024 albeit on a phased basis as follows:
Item contributed by Astrid Keinath, Counsel in our Frankfurt Corporate Governance team |
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