Governance and Regulatory Spotlight February 2025

Welcome to the first edition of our Regulatory and Governance Spotlight in 2025. After the flurry of developments late last year, the lull of the first weeks of 2025 is undoubtedly a welcome respite for all of us!?

Governance and reporting updates

Global risk outlook

In January, the World Economic Forum (WEF) published the 20th edition of The Global Risks Report, which examines key global risks that could impact economies, societies, and the environment. Sustainability-related risks, such as extreme weather events, pollution and the loss of biodiversity, have consistently been highlighted in these reports as high-impact, high-likelihood threats for at least 15 years. It is therefore not surprising that the number of sustainability committees continues to rise, with the 2024 UK Spencer Stuart Board Index finding that 54% of the FTSE 150 companies have now established such committees. For those seeking to establish a board-level sustainability or environmental, social and governance (ESG) committee, the Chartered Governance Institute’s model terms of reference could help.

Furthermore, INSEAD’s survey of international directors indicates that 82% of directors believe their company’s board possesses a clear understanding of how sustainability will influence both the manner in which value is created and its extent. In contrast, only 48% of directors feel the same about generative AI (artificial intelligence), an emerging risk that is still being defined.

Technological-related risks are also identified as part of the longer-term top ten: outcomes of AI technologies, and cyber espionage and warfare. Companies wishing to mitigate these risks may find the WEF’s dedicated white paper useful, which addresses the challenge of responsible adoption of AI and associated cybersecurity risk mitigation.

The WEF report also identifies the significance of geopolitical risks over the next two years. In this context, the EY 2025 Geostrategic Outlook offers insights into the multiple, complex and interrelated geopolitical dynamics and how they interact with other disruptive forces shaping global transformations, including technology and sustainability.

Additionally, misinformation and disinformation remain at the top of the list of risks expected to have the greatest impact in the next two years and also rank highly in the long term. This underscores the importance and value of annual reports as a trusted ‘record’ to counter misinformation. This is also contributing to the evolution of expectations for assurance over non-financial and sustainability reporting, which we cover below under Green Spotlight.

Diversity and inclusion

In the boardroom

The 2024 FTSE Women Leaders Review report?was published on 25 February. Key findings include:

??FTSE 350 boards are essentially gender balanced;

??Executive teams continue to make progress although without a concerted push, parity may take a little longer than 2025; and

??The 50 largest private companies are keeping pace with the FTSE 100 with 37% of executive committee roles held by women.

Furthermore, the 2024 UK Spencer Stuart Board Index shows that 71% of boards now include at least one woman in a senior role, up from 60% in 2023. However, women still face challenges in securing the most senior positions, such as chair and chief executive, with the senior independent director role being the most commonly held by women, a finding echoed by the 2024 FTSE Women Leaders Review. Additionally, the percentage of new directors from minority ethnic groups has declined to 7% in 2024, down from previous years. It will be interesting to see how this is reflected in the 2024 Parker Review, which is due to launch on 11 March. See the events section below to sign up for our webcast.

The index also highlights a preference for experienced individuals, reflected in the decrease of first-time appointees. With various specific initiatives, it is important that the consideration of diversity in its broadest sense is not lost. As noted in our publication, Reframing the governance narrative, in the interests of board effectiveness, boards must remain focussed on factoring in diversity of thought and cognitive strengths.

Workforce

In September 2023, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) consulted on proposals to require certain financial services firms to implement strategies, collect and report data and set targets in relation to diversity. While the FCA had committed to publishing a final policy statement in 2024 with new rules coming into force 12 months later, this has not transpired as respondents raised serious concerns about the cost effectiveness, appropriateness and effectiveness of the proposals. The FCA has now confirmed that final rules on non-financial misconduct will be published in early 2025, followed by FCA and PRA policy statements on the remaining proposals later in the year. The Institute and Faculty of Actuaries has also recently decided not to proceed with the proposed mandatory changes to the Actuaries’ Code concerning diversity, equity and inclusion (DEI) but instead, opted for general clarifications to existing principles that promote respect and protect against bullying and unfair treatment.

Green Spotlight

In January 2025, the Financial Reporting Council (FRC) published a thematic review of Climate-related Financial Disclosures (CFD) by AIM and large private companies, following the first cycle of mandatory reporting. The review sets out the FRC’s expectations, provides examples of good practice and explains the interaction between the Taskforce on Climate-related Financial Disclosures (TCFD) and CFD.

The FRC also published its final report from the market study on sustainability assurance, highlighting the immaturity of the UK sustainability assurance market and noting concerns about the consistency of the quality of assurance offered. Without a solid regulatory framework this could lead to unreliable sustainability information for decision-making, hindering investment, planning and capacity development. The FRC’s proposed remedies include establishing a clear UK policy framework for sustainability assurance that provides medium-term certainty for providers and reporters, supports investment, and aligns with international standards where appropriate. It also suggests the need for a unified regulatory regime that consolidates standard setting, oversight, enforcement and market monitoring to improve the quality of both reporting and assurance.

In line with its recommendations on the need for education for those involved in preparing, assuring and using sustainability information and reports, these frequently asked questions on the fundamentals of sustainable reporting assurance produced by Accountancy Europe are useful. It will be interesting to see how the recommendations of the FRC’s final report from the market study are considered when the UK government consults on sustainability assurance later in the year.

Other regulatory updates

UK Finance has developed financial services-specific guidance to complement the Home Office's guidance on the 'failure to prevent fraud' offence, introduced under the Economic Crime and Corporate Transparency Act 2023. This document outlines the interpretation of the failure to prevent fraud offence within the financial services sector and provides examples of reasonable prevention procedures, as well as circumstances where it may not be deemed reasonable for a firm to implement such procedures.

Events

Join us?for?in-person on Monday 10 March 2025 (8 to 10:30 am) to discuss the new Failure to Prevent Fraud offence; the approach being taken to 'reasonable procedures'; and some of the key challenges.?

Join our webcast on Tuesday 11 March for the launch of the 2024 Parker Review report. During this event, we will present the key findings related to ethnic diversity in the senior management and boards of FTSE 350 companies, as well as engage in a discussion of various perspectives on these findings.?

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 Regulatory and Public Policy team

Contacts

?

Mala Shah-Coulon Associate Partner Ernst and Young LLP

+44 (0)20 7951 0355

[email protected]

Maria Kepa Director Ernst and Young LLP

+44 (0)20 7951 8164

[email protected]