This UK corporate governance update covers the period from February to May 2024. A general election was announced on 22 May with the election taking place on 4 July. Parliament has been dissolved and will meet again on 9 July with the King’s Speech setting out the Government’s legislative proposals on 17 July. By convention, there will be very little activity during the election period and we await hearing the priorities of the new Government with interest.
Please click on the relevant headings below to read more information on each of the topics or click here for a printable copy.
UK Sustainability Disclosure Requirements
On 16 May 2024, the UK Government published Sustainability Disclosure Requirements: Implementation Update 2024. This follows the commitment set out by the Government to introduce sustainability disclosures in its green finance strategy update in March 2023 and an initial indication that it would look to endorse the International Sustainability Standards Board (ISSB) standards in August 2023.
The ISSB published its first two sets of sustainability disclosure standards in June 2023, covering general disclosures and climate related disclosures. The Government recognises the role of international comparability of disclosure standards and is therefore considering whether the ISSB standards (IFRS S1 and IFRS S2) should form the basis of the UK Sustainability Disclosure Requirements instead of designing standards for the UK from scratch.
It is therefore establishing the independent UK Sustainability Disclosure Technical Advisory Committee (the UK Sustainability Disclosure TAC) to provide advice on the UK Sustainability Disclosure Requirements to the Secretary of State for Business and Trade when making a decision as to whether to endorse the ISSB Standards. Assuming a positive endorsement decision is taken, the UK endorsed ISSB standards will be known as the UK Sustainability Reporting Standards (UK SRS). Subject to endorsement and following consultation, the FCA will use the UK SRS to introduce requirements for UK listed companies. The Government will then decide on disclosure requirements for UK registered companies. The newly established Sustainability Disclosure Policy and Implementation Committee will be responsible for coordinating implementation decisions taken by the Financial Conduct Authority (FCA) and Department for Business and Trade (DBT).
As indicated below, the FCA and the Government will also consider the approach for UK companies to transition planning (to net zero) as part of the UK SRS implementation process. This is partly due to IFRS S2 containing a requirement for companies to disclose details of their transition plan if they have one, but also to deliver on a commitment set out by the Government in its green finance strategy last year. Any recommendation will likely be made with reference to the Transition Plan Taskforce's (TPT) Disclosure Framework published in October 2023.
The update indicates that the process and timeline for the UK SRS will be as set out below. The FCA (in Primary Markets Bulletin 49) updates the timeline it had previously set out for endorsing the ISSB Standards (in Primary Markets Bulletin 45) to align with the below:
Q2 2024
- Sustainability Disclosure TAC to commence assessment of IFRS S1 and IFRS S2
- DBT to consult on government approach to transition plan disclosures for UK companies
Q4 2024
Sustainability Disclosure TAC to conclude assessment and make recommendations to Secretary of State for Business and Trade
2024
FCA will support progress towards adopting ISSB based sustainability disclosures for listed companies
Q1 2025
Subject to positive endorsement decision, government will publish UK SRS
Q2 2025
Subject to positive endorsement decision:
- FCA will consult on updating TCFD aligned disclosures for listed companies to UK SRS
- UK government will consult on draft UK SRS for UK registered companies
- UK government to consider exemptions from pre-existing requirements in the Companies Act 2006 for those that choose to use the UK SRS on a voluntary basis
Subject to results of UK government’s consultation on transition plan disclosures, FCA to consult on strengthening transition plan disclosure expectations in line with TPT framework
2026
Any changes introduced would be effective no earlier than accounting periods beginning on or after 1 January 2026
TPT Sector guidance
On 9 April 2024, the Transition Plan Taskforce (TPT) published its final sector specific guidance to accompany the disclosure framework (which was published in October 2023). The TPT disclosure framework is intended to establish a "gold standard" for transition plans.
The sector specific guidance covers Asset Managers, Asset Owners, Banks, Electric Utilities and Power Generators, Food and Beverage, Metals and Mining and Oil and Gas. The sectors were chosen taking into account GHG emissions, its need for or the provision of transition finance and the quality of existing guidance. The TPT also identified sectors where it thought additional guidance would be beneficial in kickstarting transition plan disclosures.
As referred to in the section above on "UK Sustainability Disclosure Requirements", the Government and the FCA are considering the approach to transition planning as part of the process for establishing UK Sustainability Reporting Standards (based on the ISSB standards). Given that the TPT disclosure framework is designed to complement and build on the climate related disclosures in the ISSB standards, it is likely that any recommendation on transition planning will be based on the TPT framework. Therefore, we would recommend that listed or large companies in those sectors consider the sector guidance and TPT framework if designing transition plans in the near future.
Diversity and Ethnicity Reporting
Parker Review 2024 update report
On 11 March 2024, the Parker Review committee published its latest update report looking at ethnic diversity of boards and senior management of FTSE 350 companies and the 50 largest private companies in the UK for the calendar year 2023. Premium and standard listed companies are required by the Listing Rules to report in their annual reports, on a comply or explain basis, as to whether they have met certain diversity targets. In relation to gender, there is a target of 40 per cent female representation on the board and, in relation to ethnicity, the target is to have at least one board member who is from an ethnic minority.
This is the first year that the report covers senior management (executive committee and one level below that) of FTSE 350 companies and private companies. The report states that 96 per cent of FTSE 100 companies now have at least one ethnic minority director and that 70 per cent of FTSE 250 companies met this target, noting that the target deadline for FTSE 250 companies is December 2024 and that considerable progress has already been made. 82 FTSE 100 companies reported on their senior management. This showed that 13 per cent of senior management was from an ethnic minority. The Review has asked the 50 largest private companies to meet the target of one ethnic minority board member by December 2027 and the data showed that of the 36 companies that responded, 61 per cent had already reached this target.
FTSE Women Leaders Review report
On 27 February 2024, the FTSE Women Leaders Review published its latest report looking at gender balance in the FTSE 350 and the 50 largest private companies in the UK for the calendar year 2023. The Review continues the work of the Hampton-Alexander Review and the Davies Review. Overall the report highlights progress in a number of areas, including that the 40 per cent target for women on FTSE 350 boards was met in January 2023, three years ahead of the target date and that this percentage further increased to 42.1 per cent in January 2024. The Review is hopeful that the 40 per cent target for women in leadership (i.e. the two senior management layers below the board) for FTSE 350 companies should be met by the end of 2025. The report notes that the UK system is voluntary (rather than a quota system) and on a much bigger scale than other international counter-parts, for example France and Norway.
FCA changes to ethnicity reporting
As set out above, premium and standard listed companies are subject to various ethnicity reporting requirements in relation to members of the board and executive management. In Primary Market Bulletin 49, the FCA states that it is proposing to make a change to the description of the Other Ethnic Group category in the rules to align it with the Office of National Statistics (ONS) Other Ethnic Group category description. This change will be made later in the summer alongside the other Listing Rule changes relating to the Listing Review with the revised rules applying to companies shortly afterwards. The FCA also notes that it wishes to encourage companies in scope of its diversity and inclusion requirements to give flexibility to allow individuals to use the Other Ethnic Group category to identify themselves within a broad range of groups, including religious groups in line with the ONS.
Reform of non-financial reporting framework
On 19 March 2024, DBT published a written ministerial statement setting out the Government's intention to reform the non-financial information reporting framework.
The statement advised that the Government will lay legislation in summer 2024 to increase the monetary thresholds that determine company size by 50 per cent and consult on further changes to reporting requirements for medium sized companies aimed at reducing the burden of reporting.
The new increased monetary thresholds are set out below. The Government states that the effect of these changes will be to reclassify 5,000 large companies as medium, 13,000 medium as small and 113,000 as micro-sized. This would enable many companies to benefit from simplified reporting requirements.
The legislation will also remove several low value, obsolete or overlapping requirements from the Directors' Report and the Directors' Remuneration Report and make it easier for companies to file digital accounts.
2 out of 3
Annual turnover (£) (not more than)
- Micro - Old: 632k / New: 1m
- Small - Old: 10.2m / New: 15m
- Medium - Old: 36m / New: 54m
- Large - Old: 36m+ / New: 54m+
Balance sheet total (£) (not more than)
- Micro - Old: 316k / New: 500k
- Small - Old: 5.1m / New: 7.5m
- Medium - Old: 18m / New: 27m
- Large - Old: 18m+ / New: 27m+
Average number of employees (not more than)
- Micro - Old: 10 / No change
- Small - Old: 50 / No change
- Medium - Old: 250 / 500*
- Large - Old: 251+ / New: 501+*
*Potential increase in maximum number of employees depending on consultation results
On 16 May 2024, DBT published the consultation on reporting requirements for medium sized companies seeking feedback on two proposals:
To exempt medium sized companies from producing a strategic report
Further amend the definition of a medium sized company by increasing the employee threshold from a maximum number of employees of 250 to 500.
The consultation is open until 27 June 2024.
The changes to the thresholds (assuming they come into force) will be welcome news for many companies as they deal with increasing reporting requirements in a number of areas, including sustainability issues (as described above). It also reflects recent changes in the EU with amendments to the criteria for determining company size set out in the Accounting Directive.
Stewardship Code review
The UK Financial Reporting Council (FRC) launched a "fundamental review" of the UK Stewardship Code 2020 (Stewardship Code) on 27 February 2024. The review will consider, amongst other matters, the extent to which the Stewardship Code:
supports long term value creation through appropriate engagement between investors and issuers;
creates reporting burdens on issuers and Stewardship Code signatories; and
leads to unintended consequences, for example, short termism in targets for issuers.
The review will take place in three phases:
A targeted outreach to the four main groups affected by the Stewardship Code (issuers, asset managers, asset owners and service providers).
A public consultation after the 2024 AGM season during summer 2024.
Publication of the revised Stewardship Code in early 2025.
Once the revised Stewardship Code is published, the FRC will ensure the implementation timetable gives signatories sufficient time to respond to changes.
As part of the review the FRC will engage closely with other regulators who have an interest in the Stewardship Code including the FCA, the Department for Work and Pensions and the Pensions Regulator.
The FRC has now held a series of roundtable discussions (as part of the first phase) with issuers, asset managers, asset owners and service providers on the efficacy of the Stewardship Code and areas for potential improvement.
This is the first review of the Stewardship Code since 2019. The last review saw significant changes to the Stewardship Code, with stricter requirements (including annual reporting) and a change in focus from required policies and procedures to stewardship outcomes. It will be interesting to see how the FRC balance the desire to maintain the status of the UK Stewardship Code as a best practice benchmark for investment stewardship globally against the push to reduce the reporting burden and red tape faced by companies in the UK.
Pre-emption Group – first PEG monitoring report
On 5 March 2024, the Pre-emption Group (PEG) published its first report monitoring the use of the revised statement of principles for the disapplication of pre-emption rights for UK listed companies which was published in November 2022 (2022 statement). The 2022 statement allows listed companies to seek authority to disapply pre-emption rights for up to 20 per cent of issued share capital, split between 10 per cent for general corporate purposes and 10 per cent for an acquisition or a specified capital investment. The report, which covers the period from 4 November 2022 to 31 July 2023, notes the following:
55.7 per cent of the 289 FTSE 350 companies that tabled a resolution to disapply pre-emption rights sought an enhanced authority (i.e. one that exceeded the authority permitted under the previous statement of principles published in 2015 (2015 statement))
A small minority of investors are voting against all resolutions seeking enhanced disapplication authorities as they disagree with the 2022 statement and this will be monitored
Many companies were still using elements of the 2015 statement. PEG emphasises that the 2022 statement constitutes best practice and companies should aim to align with that even if they do not seek the full amount of disapplication authority
Annual financial reports for listed companies
Primary Market Bulletin 49 sets out a number of reminders to issuers from the FCA in relation to disclosure and filing requirements for annual financial reports for listed issuers. These include the following:
DTR 6.2.10R requires that an annual financial report must be filed with the FCA by uploading it to the National Storage Mechanism (NSM). The FCA notes that a number of issuers have published their reports via a regulatory announcement but not filed them with the NSM. Including links in an announcement to other hosting sites but not uploading it to the NSM does not meet the filing requirement
DTR 4.1.15R requires that annual financial reports are prepared in XHTML format. Reports must also be tagged using digital classification (DTR 4.1.17R to 4.1.18R).
Publication of Payment Practices Regulations
On 1 April 2024, the Reporting on Payment Practices and Performance (Amendment) Regulations 2023 were published and came into force on 5 April 2024. The final regulations are in line with the draft regulations published in January 2024, which were covered in our Corporate Governance Update Spring 2024. On 21 May 2024, draft Reporting on Payment Practices and Performance (Amendment) (No 2) Regulations 2024 were laid before Parliament. The draft Regulations amend previous regulations to require qualifying companies and LLPs to publish information on payment practices and policies with respect to retention clauses in any construction contracts with suppliers and are stated to come into force on 1 October 2024. They require additional information to be reported by qualifying companies and LLPs for financial years beginning on or after 1 January 2025.
