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Publication date: 29 Feb 2024
uk March 2024 Year end reminders
Reporting on diversity and inclusion on company boards
The FCA released a policy statement (PS22 / 3) in April 2022, establishing requirements under the Listing rules (LR 9.8.6R(9) and LR 14.3.33R(1)) for issuers that are in scope to include a statement in their annual financial report setting out whether they have met specific board diversity targets on a ‘comply or explain’ basis, as at a chosen reference date within their accounting period and, if they have not met the targets, why not. This allows companies flexibility to provide relevant context on their approach to board diversity, whether or not these targets are met. The targets are:
- At least 40% of the board are women.
- At least one of the senior board positions (Chair, CEO, SID or CFO) is a woman.
- At least one member of the board is from a minority ethnic background (which is defined by reference to categories recommended by the Office for National Statistics (ONS)) excluding those listed, by the ONS, as coming from a white ethnic background).
Changes to the Disclosure guidance and Transparency Rules (DTR)
DTR 7.2.8AR requires in-scope companies to disclose in their corporate governance statement the diversity policy applied to their board, or to explain where no such diversity policy is applied. The Policy Statement expands these reporting requirements to cover the diversity policies of key board committees and to indicate that reporting on board and board committee diversity policies could consider wider diversity characteristics.
Start date
All of the final rules apply to accounting periods starting on or after 1 April 2022.
Reminders on climate change reporting requirements
Premium listed and standard listed companies have been required to report using the TCFD framework since 1 January 2021 and 1 January 2022 respectively, under LR 9.8.6R(8) and LR 14.3.27R.
For organisations that have accounting periods beginning on or after 6 April 2022, climate-related financial disclosures aligned with the TCFD framework have been extended by SI 2022/31 for companies and SI 2022/46 for LLPs (the Regulations) to certain publicly quoted companies, in addition to premium and standard listed companies, and certain large private companies and limited liability partnerships. Organisations in scope for the Regulations are as follows:
- All UK registered companies that are currently required to produce a non-financial information statement, being UK companies that have more than 500 employees AND have transferable securities admitted to trading on a UK regulated market, or are banking companies or insurance companies (that is, current Relevant Public Interest Entities (PIEs);
- UK registered companies with securities admitted to AIM with more than 500 employees;
- UK registered companies which are not included in the categories above, which have more than 500 employees and a turnover of more than £500m (these are referred to as ‘high turnover’ companies).
- Traded or banking LLPs with more than 500 employees and ‘large LLPs’ (meaning those with more than 500 employees and a turnover of more than £500m).
For companies in scope, these disclosures are required to be in the strategic report within the newly named ‘non-financial and sustainability information statement’. For those companies already required to report against the TCFD framework under the Listing Rules, we expect that they will also meet their obligations under the Regulations unless they use the comply-or-explain option in the Listing Rules to a very significant extent (note that the regulations also allow companies to explain why they have omitted aspects of the regulations if they believe them not to be necessary for an understanding of the company’s business). In February 2022, BEIS issued non-binding guidance to supplement the regulations.
FRC thematic review of TCFD disclosures - metrics and targets
In July 2023 the FRC released its latest thematic on climate, assessing the quality and maturity of climate-related metrics and targets disclosures. Based on the TCFD disclosures from 20 listed companies' 2022 annual reports across four sectors (materials and buildings, energy, banks, and asset managers), the report identifies areas of better reporting practice and notes that there has been incremental improvement in the quality of companies' disclosure of net zero commitments and interim targets for emissions. However, opportunities exist to improve disclosures around actions and milestones to meet targets, comparability of metrics between companies, explaining plans for transitioning to a low-carbon economy clearly and concisely, and explaining how climate targets affect financial statements. The FRC recognises that systems and disclosures are still evolving, but notes that the FRC will now be more likely to enter into substantive correspondence with companies if they do not meet the expectations set out in both this thematic and the climate thematic released in July 2022 by the FRC.
Other FRC publications and reports
Audit Committees and External Audit: Minimum Standard
In May 2023, the FRC published its minimum standard for audit committees, focusing on the appointment and oversight of the external auditor. The standard largely pulls together existing provisions of the UK Corporate Governance Code and FRC guidance into a mandatory basis for future monitoring and enforcement by ARGA. The standard applies to FTSE 350 companies on a comply or explain basis with immediate effect.
FRC Lab’s guidance on ‘Materiality’
In October 2023, the FRC Lab published a report looking at how companies can improve their corporate reporting by taking a more focused, strategic approach to assessing materiality. The report provides practical suggestions and examples for identifying material issues, streamlining and prioritising key messages by considering what information is material to their stakeholders when preparing annual reports.
FRC's 2023 review of corporate governance reporting by listed companies
The FRC released its Annual Review of Corporate Governance Reporting in November 2023 setting out the results of its annual survey of the quality of reporting against the UK Corporate Governance Code.
The report starts by noting that companies continue to be more transparent than they were a few years ago in reporting departures from the Code, but the related explanations under comply-or-explain sometimes lack clarity and do not set out how their alternative arrangements delivered benefits to the company and its shareholders. There is also a continued emphasis on the need for companies to “move away from a formulaic Principle by Principle approach which adds to the length of the annual report and contains little company specific information, and instead to report clearly and concisely on how application of the Principles has made a difference to actions taken by their board”.
Risk management and internal control have been central to the ongoing debate around governance reform but the FRC notes that “there has been little year-on-year improvement in the quality of reporting in this area; some companies report very well but the majority do not, and fail to demonstrate sufficiently [that] robust systems, governance and oversight are operating effectively”.
Other areas that continue to be commented on include:
- Culture, purpose & values - including an emphasis on the link with strategy and the use of metrics and assurance.
- Shareholder engagement - disclosures have been largely generic and specific comments include the need for more committee chair engagement.
- Stakeholder engagement, including the workforce - comments in this area are generally positive, though there could be more emphasis on the outcomes of engagement, and assessment of the effectiveness of the arrangements in place.
- Diversity - which is still not often linked to a company’s strategic priorities and needs to move beyond gender and ethnicity.
- Board and committee evaluation - composition and diversity should be considered at the annual evaluation of the board, and evaluations could address committees and individual directors more fully.
- Remuneration - including the use of discretion around windfall gains post COVID.
TCFD and cyber and information technology risk are also addressed, including the use of ESG or similar committees and how boards oversee the rise of AI.
FRC’s conversation starters for investors and audit committees
In April 2023, the FRC launched a new web page providing conversation starters aimed at promoting better engagement between investors and audit committees to facilitate better understanding of companies and their approach to financial reporting and internal control.
Other future reporting developments beyond 31 March 2024
Draft Statutory Instrument on new corporate reporting requirements - now withdrawn
In July 2023, following on from the Restoring trust in audit and corporate governance consultation and the Brydon and Kingman reviews, the Government laid before Parliament a draft Statutory Instrument (SI) entitled “draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023”. The key elements, and their intended locations in the annual report included:
- Audit and Assurance Policy (Directors' Report).
- Material Fraud Statement (Directors' Report).
- Resilience Statement (Strategic Report).
- Disclosures about distributable profits, distributions, and the purchase of own shares (Financial Statements).
- Policy Statement on Distributions and Purchase of Own Shares (Directors' Report).
However, on 16 October 2023, the Government announced that it would be withdrawing the draft SI after concerns were raised about imposing additional reporting requirements. The Government has indicated that, instead of the draft SI, it will be proposing a new reform package and that it remains committed to the establishment of the Audit, Reporting and Governance Authority (ARGA).
Revised UK Corporate Governance Code 2024 and FRC Guidance
In May 2023 the Financial Reporting Council (FRC) launched a consultation to review the UK Corporate Governance Code. Subsequently, following the withdrawal of the statutory instrument on corporate reporting discussed above, the FRC released a policy update in November 2023 outlining their intention to take forward only a small number of the original 18 proposals in the original consultation and to stop development of the remainder, in line with the lead set by the Government. The policy update also stated that in relation to risk management and internal control, the highest profile aspect of the Code consultation, the UK approach would be clearly differentiated from the much more intrusive approach adopted in the US - again indicating a shift in priorities. In January 2024, the FRC published the revised Code. In relation to risk and internal control, the Code now includes an annual declaration by the board on the effectiveness of material controls as at the balance sheet date (in Provision 29).
- The provision has been structured to include the board’s annual declaration and two related descriptions: of how the board has monitored and reviewed the effectiveness of the framework; and of any material controls which have not operated effectively as at the balance sheet date, the action taken, or proposed, to improve them and any action taken to address previously reported issues
- All material controls are in scope, including financial, operational, reporting and compliance controls. The FRC has confirmed that non-financial controls (including non-financial reporting) are also in scope - this being in part the reason for the delay until 2026.
Other important updates to the Code include:
- The addition of a new principle (Principle C) which requires governance reporting to focus on outcomes; and
- Changes to the wording of the responsibilities and reporting requirements for audit committees which cross refers to the Audit Committees and the External Audit: Minimum Standard (Provisions 25 and 26).
The FRC Guidance supporting the Code was also updated in January with some substantial re-drafting, although changes to the substance are generally limited. The Guidance is now hyperlinked from the Code, which is intended to improve its accessibility.
Overall, the revised Code and Guidance respond to the Government’s lead by re-emphasising the importance of principles and case-by-case judgement in the UK governance framework, including in support of the directors’ declaration on the effectiveness of internal control. There have been calls for more prescriptive guidance to be issued but the FRC is clear that this would not sit well with the principles-based approach or the feedback it received during the consultation process.
The Code will apply for periods beginning on or after 1 January 2025, with the exception (as noted above) of the most high profile change, the board declaration on the effectiveness of internal control, which becomes effective for periods beginning on or after 1 January 2026.
Revised QCA Corporate Governance Code
In November 2023 the Quoted Companies Alliance (QCA) published a revised corporate governance code. The revised code will apply for financial years beginning on or after 1 April 2024, with a transition period of 12 months, and will be particularly relevant for AIM companies as, according to the QCA, over 90% of them use it. Some of the main updates relate to stakeholders (including environmental and social issues and climate change), diversity and succession planning. Structurally, the revised code also incorporates the QCA’s previously supplementary guidance on remuneration and brings additional content on board composition into the main body of the code itself.
Calls for evidence connected with the Government’s Green Finance Strategy
A number of calls for evidence relating broadly to undertakings set out in the Government’s Green Finance Strategy have been issued since March 2023. The first, the Smarter regulation non-financial reporting review from the Department for Business and Trade, sought views on the non-financial reporting requirements UK companies need to comply with to produce their annual report, and whether company size thresholds remain appropriate. A second call for evidence was issued by the FRC in July 2023, in its role as the secretariat to the UK Sustainability Disclosure Technical Advisory Committee, focused on the proposed endorsement of the IFRS Sustainability Disclosure Standards in the UK. Finally, in October 2023, the Department for Energy Security and Net Zero issued a call for evidence on Scope 3 Emissions in the UK Reporting Landscape, including a post-implementation review of Streamlined Energy and Carbon Reporting.
The International Sustainability Standards Board (ISSB)
The International Sustainability Standards Board (ISSB) issued its first two sustainability reporting standards in June 2023. These are:
- General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1), the core framework for the disclosure of material information about sustainability-related risks and opportunities across an entity’s value chain.
- Climate-related Disclosures (IFRS S2), the first thematic standard issued that sets out requirements for entities to disclose information about climate-related risks and opportunities.
In brief INT2023-15 and UK In depth INT2023-05 provide further guidance.
The standards are applicable for annual reporting periods beginning on or after 1 January 2024, however the Government is yet to determine which UK companies will be in scope and the exact effective date. As noted above, a call for evidence by the FRC in its role as The Secretariat to the UK Sustainability Disclosure Technical Advisory Committee on the prospective use of IFRS S1 and IFRS S2 closed in October 2023, and the FCA has indicated that it will also consult on this matter in the first half of 2024.
EU Corporate Sustainability Reporting Directive (CSRD)
The CSRD was published in the EU Official Journal in December 2022. As well as setting specific areas of disclosure, the Directive requires in-scope companies to adopt a set of European Sustainability Reporting Standards (‘ESRS’), and to implement the EU Taxonomy on sustainable activities. Mandatory assurance of sustainability information, starting with limited assurance from 2024 and potentially moving to reasonable assurance from 2027, is also part of the Directive. In terms of applicability, for EU companies and groups there is a significant extension in scope compared with the existing non-financial reporting Directive. From a UK-incorporated group perspective the Directive has significantly wider consequences than was originally expected, with the most common scenarios for the applicability of CSRD for UK companies being the following:
- ‘Large’* non-EU (including UK) companies with securities (debt or equity) listed on EU regulated markets and more than 500 employees for financial years starting on or after 1 January 2024. Companies with securities listed on EU regulated markets, but which do not meet these size thresholds, come into scope at later dates.
- ‘Large’* EU-incorporated subsidiaries or EU-incorporated subgroups of UK groups for financial years starting on or after 1 January 2025 .
- UK-incorporated parent groups with > €150m net turnover in the EU over the last two consecutive financial years, with at least one ‘large’* EU-incorporated subsidiary or subsidiary listed on an EU-regulated market, or a branch generating >€40m net turnover in the preceding financial year, will need to report their group sustainability information for financial years starting on or after 1 January 2028.
In December 2023, EFRAG published three draft ESRS Implementation Guidance documents on materiality assessment, value chain and data points aimed to support the application of the sector-agnostic ESRS. The consultation on these closes in February 2024. Additionally, EFRAG has launched a Q&A platform where stakeholders can raise specific ESRS application questions.
Applicability is complex and we recommend taking legal advice where appropriate.
*Large is defined as exceeding at least two of the following three metrics on two consecutive annual balance sheet dates - total assets of €25 million, net turnover (revenue) of €50 million and an average of 250 employees. These balance sheet and net turnover thresholds include a 25% increase to account for the effect of inflation. EU Member States are to apply the new thresholds at the latest from FY24 and have the option to allow undertakings to apply the provisions from FY23.
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