Corporate Law Update

In this week’s update: new requirements to comply or explain against the TCFD Recommendations, new guidance on ESG and climate reporting, minimum content requirements for exemption documents on a securities-exchange takeover, ESEF taxonomy is published, confirmation that the modern slavery registry is to be launched in 2021 and new guidance on gender pay gap reporting.

The FCA introduces a new requirement to comply or explain against the TCFD Recommendations
The FCA publishes new guidance on reporting on ESG and climate-related matters
The European Commission publishes the minimum content requirements for a prospectus “exemption document” on a securities-exchange takeover
The taxonomy for the European Single Electronic Format is published
The Government confirms that its modern slavery registry is to be launched in 2021
The Government publishes new guidance to employers on gender pay gap reporting

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FCA introduces mandatory climate-change reporting

The Financial Conduct Authority (FCA) has introduced new requirements for premium-listed companies to report against the recommendations and recommended disclosures of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (the TCFD).

The TCFD was created in 2015 to develop recommendations for climate-related disclosures. In June 2017, it published its Final Report, setting out eleven specific recommendations (the TCFD Recommendations). These have quickly become a globally recognised framework for developing consistency in climate change reporting.

In March 2020, the FCA published a consultation in which it proposed to introduce changes to its Listing Rules to require listed companies to report against the TCFD Recommendations.

The FCA has now published Policy Statement PS20/17, in which it summarises the responses to its consultation and confirms that it has now introduced its proposals. In short:

The new requirement will apply to premium-listed commercial companies (including sovereign-controlled commercial companies) for financial years beginning on or after 1 January 2021.
These companies will need to state whether they have made disclosures consistent with the TCFD Recommendations in their annual financial report.
If the company has not disclosed against a TCFD Recommendation, it will need to identify this, explain why and set out the steps it plans to take to do so in the future.
If the company makes disclosures against the TCFD Recommendations outside its annual report, it will need to direct readers to the relevant document and explain why it has done so.
When deciding whether it has disclosed properly against the TCFD Recommendations, a company must take into account the guidance annexed to the TCFD Recommendations. The FCA expects companies to have regard to other TCFD guidance as well.
As a general overriding principle, a company must consider whether its disclosures provide sufficient detail to enable readers to assess its exposure and approach to climate-related issues. The level of detail will vary, depending on the company’s exposure to climate-related risks and opportunities and the scope and objectives of its climate-related strategy.
The FCA would normally expect a company to be able to disclose against the TCFD Recommendations, except where it faces “transitional challenges in obtaining relevant data or embedding relevant modelling or analytical capabilities”.

The changes are implemented by FCA Instrument 2020/75.

Separately, last month the UK Government set out its proposals to roll out mandatory TCFD reporting to a wider range of organisations, including larger private UK companies, banks and building societies, insurance companies, asset managers, life insurers and pension schemes. See our previous Corporate Law Update for more information.

FCA publishes guidance on ESG reporting

The Financial Conduct Authority (FCA) has introduced new guidance to issuers on reporting on environmental, social and governance (ESG) matters, including climate change.

The guidance will be set out in a new Technical Note, which has yet to be published but the text of which can be found in Appendix 2 to its Policy Statement PS20/17.

The Technical Note covers disclosures under:

the FCA’s Listing Rules;
the EU Prospectus Regulation;
the FCA’s Disclosure Guidance and Transparency Rules (DTR); and
the EU Market Abuse Regulation (MAR).

Although EU legislation, the Prospectus Regulation and MAR will be incorporated into UK law and continue to apply in the UK, albeit in modified form, when the UK/EU transition period ends at 11:00 p.m. GMT on 31 December 2020.

The Technical Note makes the following key points:

In complying with their obligation under the Listing Rules to take steps to establish and maintain adequate procedures, systems and controls, listed companies may need to access and draw on specific data sources that may not typically be used for other business purposes.
Listed companies must remember their specific obligations to comply with or explain against the UK Corporate Governance Code (which covers ESG matters) and the TCFD Recommendations.
When publishing a prospectus (whether offering shares to the public or admitting shares to a regulated market), an issuer should consider whether it needs to provide information on ESG and climate-related matters so as to allow an investor to make an informed assessment of the issuer and the issuance.
Issuers should also consider whether they need to set out any ESG or climate-related matters in the risk factors section of their prospectus.
Companies admitted to a regulated market should consider what ESG and climate-related information they need to provide in their annual and interim management reports in order to comply with the obligation in the DTR to state the principal risks and uncertainties they face.
In particular, they should consider including key performance indicators (KPIs) relating to environmental matters and employee matters when setting out a fair review of their business.
Finally, issuers that are subject to MAR should remember that the obligation to disclose inside information publicly as soon as possible extends to inside information that relates to ESG and climate-related matters.

EU publishes content requirements for takeover exemption document

The European Commission has published the final text of a new delegated regulation setting out the minimum content requirements for the document that can be published in place of a prospectus on a merger, division or takeover involving an issue of equity securities as consideration – a so-called “exemption document” or “exempted document”.

The content requirements are set out in annexes to the regulation.

The Commission previously consulted on the proposed content requirements in June 2020. See our previous Corporate Law Update for more information.

The requirements broadly mirror those in the draft regulation from the June consultation. The key changes are more comprehensive content requirements where the equity securities to be offered are not fungible with existing equity securities already admitted to trading on a regulated market, or where the takeover is a reverse acquisition transaction under IFRS 3.

The Regulation will enter into force on the 20^th day after it is published in the EU’s Official Journal. This means that the Regulation will not form part of UK law when the EU/UK transition period ends at 11:00 p.m. (UK time) on 31 December 2020. It will be for the UK to introduce its own content requirements for exemption documents in due course.

Also this week…

EU publishes ESEF taxonomy. Legislation has been published introducing the taxonomy to be used under the new European Single Electronic Format (ESEF) for corporate reporting. The ESEF will apply in the UK for financial years beginning on or after 1 January 2021, with reporting to begin in 2022. However, the new EU regulation does not come into effect until 7 January 2021 and so will not automatically form part of UK law following the end of the UK/EU transition period at 11:00 p.m. GMT on 31 December 2020. It will be for the UK authorities to introduce an appropriate taxonomy.
Government to launch modern slavery registry in 2021. In response to a written question, Baroness Williams of Trafford has confirmed that the UK Government is to launch the proposed new Government-run modern slavery registry in 2021. The registry will bring together slavery and human trafficking statements published under section 54 of the Modern Slavery Act 2015.
Government publishes gender pay gap reporting. The Government Equalities Office has published new guidance to employers on gender pay gap reporting. The guidance covers who needs to report information, what information employers must gather and publish, and how to calculate their gender pay gap.