Corporate Law Update

In this week’s update: An FRC review into climate change impact reporting, significantly updated PLSA voting guidelines, analysis of significant shareholder opposition, information on the transition to the new National Storage Mechanism and a study of supply chain due diligence.

FRC to review how companies report on climate change

The Financial Reporting Council (FRC) has announced that it will conduct a major review into how companies and auditors assess and report on the impact of climate change.

The review will consider how the quality of information can be improved to support informed decision-making by investors and other stakeholders. In particular, the FRC will:

  • review a sample of company reports across industries to assess the quality of compliance with climate change reporting requirements;
  • assess a sample of audits to review how auditors are ensuring the impact of climate risk has been appropriately reflected in company reports;
  • evaluate the quality of disclosures under the 2018 UK Corporate Governance Code regarding risk, emerging risk and long-term factors affecting viability; and
  • evaluate whether companies have adopted the Financial Reporting Lab’s recommendation to report in line with the Task Force on Climate-related Financial Disclosures framework.

The FRC has said it will also consider how investors are addressing the climate challenge in the stewardship of their investments when it monitors the first reports under the new Stewardship Code.

PLSA publishes revised voting guidelines

The Pensions and Lifetime Savings Association (PLSA) has published a revised version of its annual voting guidelines.

The Guidelines have been completely overhauled to place greater emphasis on investor stewardship and on environmental, social and governance (ESG) matters. This is in part reflected by the change in the name of the guidelines from “Corporate Governance Policy and Voting Guidelines” to “Stewardship Guide and Voting Guidelines”.

The Guidelines are now structured as follows:

  • Corporate governance vs. stewardship. The Guidelines explain the distinction between corporate governance (driven by companies) and stewardship (driven by investors). They also explain how investor stewardship encompasses but goes beyond ESG matters.
  • Focus on stewardship. The Guidelines place significant emphasis on investor stewardship, introducing three checklists for investors covering effective stewardship, engaging with companies and voting on resolutions. Given the PLSA’s role, the Guidelines naturally focus on specific matters for pension funds to consider, especially in light of recent and forthcoming legislative changes that require pension schemes to include more detail on stewardship, engagement and voting in their statements of investment principles.
  • Corporate governance policy. The Guidelines retain the PLSA’s previous corporate governance policy, although it has been substantially re-written. The policy emphasises the need for mid-sized and smaller quoted companies to adopt good corporate governance, to adopt prompt and effective corporate communication and to avoid “boiler-plating”.
  • Voting guidelines. Finally, the PLSA has retained its voting guidelines for investors. Instead of providing voting recommendations for specific types of resolution, the Guidelines now suggest how investors might respond to deficiencies in corporate governance by voting in a particular way on particular resolutions. To this end, the Guidelines mirror the structure of the UK Corporate Governance Code, with additional sections for climate change and sustainability, capital allocation and structure, and taking a “holistic” view.

IA releases voting trends during 2019

The Investment Association (IA) has published its annual analysis of voting trends during the 2019 reporting season.

The review accompanies the IA’s Public Register, which records “significant” shareholder opposition (20% or more) to resolutions recommended by the boards of FTSE All Share companies.

The IA monitors all types of resolution, but its analysis focuses on those relating to executive pay (“pay-related resolutions”) and individual director re-elections (“director-related resolutions”).

The key points coming out of the review are as follows:

  • Overall levels of opposition were similar to 2018. Among the FTSE All Share, 158 companies (25.5%) were put on the register, a slight increase from 151 in 2018. The IA recorded 76 pay-related resolutions (up slightly from 74 in 2018) proposed by 62 companies, and 103 director-related resolutions (down slightly from 105 in 2018).
  • The FTSE 100 was almost unchanged. 21 companies and 18 pay-related resolutions appeared on the register (the same as in 2018). Director-related resolutions increased from 5 to 8.
  • The FTSE 250 fared worse. 70 companies (47%) appeared on the register, up from 55 (37%) in 2018. The IA recorded 36 pay-related resolutions proposed by 31 companies, an increase from 28 in 2018. However, director-related resolutions declined from 47 in 2018 to 43 in 2019.
  • The FTSE Small Cap improved. 67 companies (25%) appeared on the register, a decrease from 75 (28%) in 2018. Likewise, the number of pay-related and director-related resolutions declined from 28 and 53 respectively in 2018 to 22 and 52 respectively in 2019.

Although the metrics show only a small change from 2018, the IA notes that companies are doing more to acknowledge shareholder dissent. It says over 80% of companies publicly acknowledged concerns and outlined how their shareholder engagement plans– up from 55% in 2017 (the Register’s first year).

FCA prepares for launch of new National Storage Mechanism

The Financial Conduct Authority (FCA) has published guidance in preparation for the launch of the new National Storage Mechanism (NSM) portal later this year. The FCA will be taking over responsibility for the NSM from its current operator, Morningstar.

The NSM is the official on-line storage mechanism for regulated information published under the FCA’s Listing Rules, Disclosure Guidance and Transparency Rules (DTR) and Prospectus Regulation Rules. Issuers upload information to the NSM through the FCA’s Electronic Submission System (ESS).

The updated webpage gives the following important advice:

  • The FCA will send issuers a link to the new NSM portal before it is launched.
  • The ESS will be amended to allow both issuers and their representatives to upload information to the NSM. The FCA will no longer be accepting email uploads.
  • Each individual uploader will need their own personal ESS account. The FCA has advised anyone who may need to upload information in April, May or June to register for an account.
  • To obtain an ESS account, an uploader will need to provide an authorisation letter from the issuer they are representing. The FCA has published a template letter for this purpose.

The FCA has also published a user guide containing step-by-step guidance for registering an ESS account and obtaining issuer authorisation.

EU publishes study on supply chain due diligence

The European Commission has published a study on due diligence requirements through the supply chain. It focuses on due diligence requirements to identify, prevent, mitigate and account for abuses of human rights, serious bodily injury or health risks and environmental damage.

The study was carried out by the British Institute of International and Comparative Law (BIICL), Civic Consulting and the London School of Economics and Political Science (LSE).

It is likely to be of interest to persons within large organisations who are involved in engaging with or conducting diligence on suppliers and intermediaries. More broadly it will be of interest to persons responsible for environmental, social and governance (ESG) matters with firms.

The study covers topics such as human rights abuses (including modern slavery and human trafficking) and environmental impacts (such as climate change).

The review covers the following:

  • Current market practices in supply chain due diligence. This includes a survey of businesses and stakeholders to understand current practices. It also contains several interesting real-life case studies that serve as examples of good practice.
  • A review of the current regulatory framework. This examines the concept of due diligence and reviews the domestic framework in several countries (including 11 EU Member States, Australia, Brazil, Canada, Norway, Switzerland, the United Kingdom and the United States).
  • A problem analysis and potential regulatory options for intervention. This explores examples of issues with current market practices that may arise in organisations’ supply chains. Topics covered include deforestation, pollution, unsafe working conditions and modern slavery.
  • An economic assessment of those regulatory options. This will be of less interest to commercial organisations but nonetheless contains an interesting impact assessment.

Other items

  • European Commission consults on non-financial reporting. The European Commission is seeking views on the EU Non-Financial Reporting Directive. The consultation focuses in particular on expanding the types of disclosure required and the entities required to make disclosures, applying a common standard to non-financial information (NFI), and introducing stronger assurance requirements for NFI. The Commission has asked for responses by 14 May 2020.
  • Government consults on expanding dormant assets scheme. The scheme, which has been operational since 2011, allows banks and building societies to transfer money from accounts that have been untouched for 15 years to charitable causes. The Government is now consulting on extending the scheme to proceeds and distributions from other kinds of dormant asset, including insurance policies, units in authorised unit trusts, shares in public limited companies (PLCs) and open-ended investment companies (OEICs), and other kinds of investment asset. The consultation closes on 16 April 2020.