EY Governance and Regulatory Spotlight - September edition

Welcome to the September edition of our Regulatory and Governance Spotlight, which covers updates over a period longer than usual. Our last edition may have been in June, but we have not been idle over the summer months, as you will see from the developments discussed in this issue

Governance and reporting updates

The Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023 (legislation.gov.uk) were laid in draft before Parliament in July. They create new reporting requirements for UK-incorporated companies with 750 employees or more, and an annual turnover of ￡750 million or more. Further explanations on scoping are provided in the accompanying guidance.

The four proposed reporting requirements are: ??

• A statement on the triennial audit and assurance policy (AAP) along with an annual implementation report.? The Financial Reporting Council (FRC) is also proposing to introduce the AAP as a requirement within the UK Corporate Governance Code (the Code), a topic we discuss in our point of view document on key proposals to revise the Code. ??
• A resilience statement that incorporates enhanced risk reporting and builds on going concern and viability statement reporting. Risk and resilience remain focus areas for governance and reporting. A survey of the World Economic Forum’s community of chief risk officers highlights a range of global risks with the potential to threaten economic growth, destabilise global markets, and disrupt broader business operations over the next six months. You can also refer to the third EY global board risk survey to read about what distinguishes highly resilient organisations and their boards. ??
• A statement covering fraud risk assessment and measures in place to prevent and detect material fraud. The UK government also intends to introduce a new 'failure to prevent fraud' offence as part of an amendment to the Economic Crime and Corporate Transparency Bill, which was discussed in a fact sheet in June 2023. ?
• An annual distribution policy statement, which references broader capital allocation, supplemented with a new distributable profit disclosure in the financial statements.? The FRC Lab’s recent report provides guidance on how companies can improve the quality of their dividend disclosures. It is of particular relevance in the current macroeconomic environment which is changing the context in which investors assess dividend policy.

Once debated and if approved by both Houses of Parliament, the regulations are expected to come into force, on: ??

• 1 January 2025 for companies with equity shares admitted to trading on a regulated market ??
• 1 January 2026 for other in-scope companies

We have summarised the requirements in a slide deck, and our latest analysis of FTSE 350 narrative reporting, ‘Striking the right balance’ highlights some ways in which we expect these measures to impact narrative disclosures in the near term.?

Green Spotlight

Climate Reporting

The International Sustainability Standards Board (ISSB) has issued the final versions of the first two International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards - IFRS S1 and S2. Their goal is to improve the quality and comparability of sustainability information provided by companies.

• IFRS S1 ‘General Requirements for Disclosure of Sustainability-related Financial Information’ covers the overall requirements for disclosure of sustainability-related risks and opportunities over the short, medium, and long term ?
• IFRS S2 ‘Climate-related Disclosures’ sets out specific requirements for the identification, measurement, and disclosure of climate-related financial information. It is designed to be used in conjunction with IFRS S1. The standard incorporates the recommendations of Task Force on Climate-Related Financial Disclosures (TCFD) but also includes additional detail

For a fuller analysis of the standards, read the EY publication here.

Jurisdictions, including the UK, now need to consider how to reference the standards in their legal and regulatory frameworks. To this end, the FRC, as secretariat to the UK Sustainability Disclosure Technical Advisory Committee, has issued a call for evidence, which closes on 11 October 2023, to inform the proposed endorsement of the two standards in the UK, by July 2024.

If endorsed, they will be adopted as UK Sustainability Disclosure Standards (SDS). Following endorsement, decisions on whether to introduce disclosure requirements; the scope of companies caught; and the effective date will be taken by the Financial Conduct Authority (FCA) for listed companies and by the government for UK-registered companies and limited liability partnerships.

In Primary Market Bulletin 45, the FCA has reconfirmed its intention to consult both on updating the TCFD-aligned disclosure rules for listed companies to refer to the UK-endorsed ISSB standards and on moving from the current comply or explain compliance basis to mandatory disclosures for listed issuers. It will concurrently consult on guidance (rather than rules) on transition plan (TP) disclosures. This guidance is likely to refer to the final outputs from the Transition Plan Taskforce (TPT) to help issuers to report effectively on the TP-related aspects of IFRS S2. According to the TPT’s recent update, the final version of its disclosure framework is expected in October 2023, with sector-specific guidance due in 2024.

In the meantime, as companies continue to report in line with TCFD, they should consider findings from the FRC’s TCFD reporting thematic review which sets out areas for improvement, especially in relation to metrics and targets, and the disclosure of the effect of climate change on financial statements. This EY publication,?updated in August 2023, is intended to support entities in assessing and disclosing the extent to which climate change affects their financial statements prepared in accordance with IFRS.

ESG data and reporting?

The FRC published a research report about the views of Audit Committee Chairs (ACCs) on, and approach to, Environmental, Social, and Corporate Governance (ESG) activities and reporting. Amongst other observations, some ACCs reflected that ESG was too broad and that it continues to evolve and grow rapidly, which can make the measurement of ESG activities difficult and inconsistent across sectors and markets. Many ACCs felt that the increased focus on ESG in reporting was making annual reports very long thereby making it harder to identify key information.

Insights on investor views on ESG reporting can be found in the FRC Lab’s report, ‘ESG Data Distribution and Consumption’ which highlights concerns about the credibility of ESG metrics and data coming from third-party providers. The FRC has also published a research report on the influence of proxy advisors and ESG rating agencies on the actions and reporting of FTSE 350 companies and investor voting.

In light of the level of influence, it is no wonder that the FCA welcomed the consultation on a new Code of Conduct for ESG data and ratings providers. This aims to enhance consistency, transparency, and accountability to ensure that the market can have confidence in the integrity of ESG ratings and data products. In a similar vein, the European Commission released a series of measures on the transparency and integrity of ESG rating activities and the introduction of a new set of criteria for sustainable economic activities under the EU Taxonomy.

Companies with material subsidiaries or branches in the EU should also be aware that European Sustainability Reporting Standards (ESRS) which will be used to report on sustainability performance across ESG topics, under the EU Corporate Sustainability Reporting Directive (CSRD) were adopted in July. The final standards are applicable for EU undertakings. A separate set of non-EU ESRS will be developed by June 2024 for in-scope non-EU companies.

Diversity, Equality and Inclusion

Following a consultation, the Department of Business and Trade has concluded that now is not the right time to take forward a mandatory approach to ethnicity pay reporting.

Other regulatory update

In addition to the aforementioned failure to prevent fraud offence, the proposed changes to the Economic Crime and Corporate Transparency Bill strengthen anti-money laundering measures, easing information exchange among firms and enabling proactive intelligence gathering. This will be achieved primarily by reforming Companies House, preventing limited partnership misuse, and bolstering powers to seize and recover criminal crypto assets. Some of the changes in respect of Companies House include introducing identity verification for all new and existing registered company directors; new powers to check, remove, or decline information submitted to, or already on, the companies register; improving the financial information on the register and cross-checking of data with other public and private sector bodies.

Publications and events?

• With days before the response deadline of 13 September, we invite those affected by the proposed amendments to the Code to read our point of view document and consider submitting a response.? ?
• For those of you starting to plan your next annual report, our latest analysis of FTSE 350 narrative reporting, ‘Striking the right balance’, will be of help. It contains good practice examples, an 'acid test', and a summary of regulatory and legislative developments impacting narrative reporting now and in the near term. ?
• Read this article from EY experts for practical insights and examples on how to apply updated guidance from the Committee of Sponsoring Organizations of the Treadway Commission (COSO) on achieving effective internal control over sustainability reporting.

UK Corporate Reform breakfast hosted by BlackLine in partnership with EY Join our very own Maria Kepa with other EY leaders at an in-person event on 14 September (10 a.m.) to hear the latest on the government’s audit and corporate governance reforms and to discuss how companies can create efficiencies while complying with the new measures.

Register now to participate in this event.

Please get in touch for help with governance or narrative reporting matters. If your colleagues would like to subscribe to this e-bulletin, please share this form.

Best wishes,

Mala and Maria

EY Corporate Governance Team

Contacts

Maria Kepa

Director

+44 (0)20 7951 8164

[email protected]

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