EQ Monthly Bulletin - February 2023

In This Edition

• BEIS Independent Review of Net Zero Targets
• FRC – ESG Statement of Intent
• Proxy Voting Guidelines - Blackrock
• Share Capital Management Guidelines
• UK Jurisdiction Taskforce: Statement on the Issuance and Transfer of digital securities
• Annual Report and Accounts – a Never-Ending Story
• Corporate Governance and Stewardship Myth-Buster

BEIS Independent Review of Net Zero Targets

The Department for Business, Energy, and Industrial Strategy (BEIS) has published an independent review of the government's approach to delivering its net zero target, including recommendations relevant to UK companies a full copy of the Review, which is 339 pages long, is available to read.   

Read More: MISSION ZERO - Independent Review of Net Zero.  

The Review has made a total of 129 recommendations. Some of these recommendations apply to companies to corporate reporting, corporate governance, and listing and prospectus reform and include: 

• ISSB. The government will endorse and implement the International Sustainability Standards Board (ISSB) standards as soon as possible. The UK should launch a formal adoption mechanism as soon as the ISSB standards are published and move quickly to assess and endorse the standards for use in the UK. The UK should aim for 2024/25 as the first sustainability reporting cycle for companies in scope, encouraging companies to apply the ISSB's standards in 2023/24 voluntarily. 
• Transition plans. The UK Transition Plan Taskforce (TPT) will share its work on net zero transition plan disclosures internationally. When more developed, TPT standards for net zero transition plans for UK companies are to be made mandatory for both listed and private companies to ensure comparable disclosure standards across the economy.
• Stewardship. The UK Stewardship Code should be updated as part of its Review at the end of 2023 to explicitly reflect the need to consider sustainability and the transition. 
• Listing and capital raising. The government and Financial Conduct Authority (FCA) should take the opportunity of the ongoing reform of the prospectus and listing regimes to review the rules to encourage integrity and growth in the market for green finance instruments to support the net-zero transition. This should include working with issuers, advisers and market participants such as exchanges and venues. The report also discusses standards for voluntary carbon markets.

Additionally, the report outlines that the government is to consider a transition taxonomy (alongside the UK green taxonomy). The report also suggests that the FCA build on the proposed Sustainability Disclosure Requirement (SDR) and investment labels to counter greenwashing. 

FRC – ESG Statement of Intent 

The Financial Reporting Council (FRC) has published a statement of intent on Environmental, Social and Governance (ESG) challenges.  

Read more: ESG Statement of Intent - What’s Next 

The update summarises the significant number of initiatives that the FRC has undertaken during the last 18 months to assist, support and drive best practice in the UK and internationally. In 2023 areas of focus will include the following: 

Development of guidance and best practices on the distribution and consumption of ESG data, along with examining how ESG data is communicated to the market and how investors, regulators and other stakeholders engage with and consume it to meet their needs. 

Examining how companies develop, assess, and use materiality to consider how enhancements to materiality processes could enable companies to report in a way that provides stakeholders with relevant and decision-useful information. 

Updating its guidance on climate-related risks for FRS 102 preparers, recognising that stakeholder demand continues to increase focus on how ESG matters can affect companies' financial position and performance. 

Providing a further comprehensive update to the FRC Guidance on the Strategic Report to capture changes in requirements, including new narrative reporting requirements, other changes to the existing non-financial reporting framework and, where necessary, any sustainability reporting arising from developments in the Sustainability Disclosure Requirements. 

It is continuing to review corporate governance reporting, including revising the UK Corporate Governance Code to recognise the growing importance of ESG reporting and its importance to the work of company boards.  

Proxy Voting Guidelines - Blackrock 

Blackrock has published its proxy voting guidelines for 2023.  

Read More: Blackrock Investment Stewardship  

There are no significant changes in policy. However, the following items have been noted as being of relevance to the UK: 

• Boards and committees - At least half the board should be non-executive directors who are, and are seen to be, fully independent. The board chair is included in this assessment of overall independence. For AIM-listed companies, the board should have at least two independent directors. The audit committee should be fully independent, and the chair and the majority of the members of the other board committees to be independent non-executive directors.
• Audit-related issues- Blackrock may vote against the re-election of board directors, specifically the members of the audit committee or equivalent, where the board needs to facilitate high-quality, independent auditing. 
• Capital - BlackRock may vote against capital issuance proposals over one-third of the nominal value of the company's current issued share capital with pre-emptive rights. With an additional one-third (two-thirds in total) applied to fully pre-emptive rights issues only. Or more than 10% of the issued capital without pre-emptive rights when the proceeds are not intended for a specific purpose. This 10% limit is raised to 20% for AIM-listed companies, investment trusts where the shares will be issued at or above NAV, and for all companies where the second 10% is for acquisition or capital investment. Any issuances above these limits would be reviewed on a case-by-case basis.

Aviva 

Aviva has published their annual Global Proxy Voting Guidelines. 

Read More: Policies and documents 

The guidelines, which are 20 pages long, have a global reach, and there is no set policy for the United Kingdom. Sustainability is high on the agenda. Aviva Investors now expects its portfolio companies to develop and publish climate transition plans "that will support the decarbonisation of economies in a socially just and inclusive manner", in line with the UK Transition Taskforce Disclosure Framework and the guidance set out by the International Sustainability Standards Board (ISSB). There is also an expectation that companies where Aviva has investments should begin reporting "within a reasonable timeframe" in line with the risk reporting guidelines produced by the Taskforce on Nature-related Financial Disclosures (TNFD), which are due to be finalised this year. 

Investment Association 

The Investment Association (IA) has issued its shareholder priorities for 2023.  

Read More: Shareholder Priorities 2023 

Through Institutional Voting Information Service (IVIS), companies with year-ends starting on or after 31 December 2022 will be monitored against several matters including: 

Responding to climate change:  Companies will continue to be amber-topped where they do not make disclosures against all four pillars of the Taskforce for Climate-Related Financial Disclosures (TCFD) framework. IVIS will also monitor whether companies have disclosed the framework or methodologies used to set their targets, the periods over which the targets have been developed, and whether a narrative has been included on their achievement.  

Accounting for climate change. IVIS will continue to monitor whether companies have stated that the directors considered the relevance of climate and transition risks associated with the transition to net zero when preparing and signing off on the company accounts. 

Diversity: Gender diversity targets will be increased by 2%, and FTSE 350 companies red-topped where women represent 35% or less of the board or 30% or less of the executive committee and their direct reports. FTSE Small Cap companies will be red topped where women represent 25% or less of the board or 25% or less of the executive committee. Companies will be assessed to ensure compliance with the new Listing Rule requirement to disclose on a comply or explain basis whether one of the Chair, Senior Independent Director, Chief Executive Officer, or finance director is held by a female but will not colour top at this stage. Additionally, FTSE 100 companies will be red topped where they have not met the Parker Review target of one director from a minority ethnic group, and amber top FTSE 250 companies that do not disclose either the ethnic diversity of their board or a credible plan to achieve the Review's targets by 2024. 

Companies are also encouraged to report against the Taskforce on Nature-related Financial Disclosures to help them assess their nature-related risks and opportunities (including whether they are contributing to or vulnerable to biodiversity loss); assess those over different forward-looking scenarios, and quantify the financial impacts. 

Share Capital Management Guidelines 

The Investment Association (IA) has issued revised capital management guidelines following the completion of the secondary capital raising Review (SCRR). The guidelines apply to companies whose shares are admitted to the premium segment of the Official List of the UK Listing Authority. Companies whose shares are admitted to the standard segment of the Official List, to trading on AIM, or to the High Growth Segment of the London Stock Exchange's Main Market, are encouraged to adopt the revised guidelines.  

Read More: Share Capital Management 

The guidance has been changed to incorporate all fully pre-emptive offers, not just fully pre-emptive rights issues, as recommended in the SCRR. Companies are expected to explain why they have chosen their capital raising structure and why it is appropriate for the company and its shareholders. 

The guidelines deal with the following matters: 

Section 551 resolution – directors' general power to allot shares: An authority to allot up to two-thirds of the existing issued share capital will be regarded as routine. Any amount in excess of one-third of existing issued shares should be applied to fully pre-emptive offers only. The authority should be approved by ordinary resolution and be for the period until the next Annual General Meeting. In calculating existing issued share capital, any shares held in Treasury should be excluded. 

Section 570 resolution - general power to dis-apply pre-emption rights: The terms of the special resolution should comply with the Pre-Emption Groups Current Statement of Principles. The IA is supportive of the template resolutions and expects any company seeking a misapplication of pre-emption rights up to 24% of the issued share capital to follow the template resolutions in so far as applicable. The guidelines note that the disapplication of pre-emption rights over lesser amounts may be appropriate for some companies. Institutional Voting Information Service (IVIS) have been instructed to red top companies which seek a routine disapplication of pre-emption rights over 24% of the issued share capital allowed by the Pre-emption Group's statement of principles, or seek a disapplication of pre-emption rights up to 24% that does not follow the Group's template resolutions, confirm it will follow the shareholder protections in Part 2B of the statement, and confirm it will follow the expected features of a follow-on offer set out in paragraph 3 of Part 2B.of the Statement of Principles. 

Authority to purchase own shares: Companies are expected to set out their proposed approach to returning capital to shareholders, including how this is aligned with the company's long-term strategy and business model. This should be supplemented with details of any distributions made to shareholders during the year under review and any expectations for the current financial year.

As the US has confirmed its intention to move to a T+1 settlement regime, HM Treasury has established an ‘Accelerated Settlement Taskforce’, whose objective is to explore the case for the UK to also adopt an accelerated T+1 settlement cycle in the UK and outline how this could be implemented. The Taskforce has created various work streams, of which the Registrars’ Group is represented, and will be approaching various market stakeholders to collect and collate comments and any general feedback.

UK Jurisdiction Taskforce: Statement on the Issuance and Transfer of digital securities 

The UK Jurisdiction Taskforce has published a statement setting out its view as to whether English private law can support the issuance and transfer of equity or debt and other contractual securities using a system deploying blockchain or distributed ledger technology (DLT).  

Read More: UKJT Legal Statement on Digital Securities (details must be entered to download the statement). 

The statement follows a consultation issued in November 2022. The Review, which must be emphasised only applies to English law, reached the following conclusions: 

In principle, there are no problems with digital securities being issued, by UK or foreign companies and governed by English law using a blockchain or DLT-based system.  

However, digital equity securities of UK companies present challenges due to complying with the requirements of the Companies Act 2006 (CA2006). While the statutory requirement for the issue of share certificates can be dispensed with by the company's articles, the statutory requirements for registers of members and instruments of transfer, as yet, cannot.  

While there is no barrier to using a permissioned blockchain or DLT-based system as a register of members, any such system would need to be designed to capture all the necessary statutory information and be capable of producing that information in hardcopy form. The statement also highlights an inability to rectify the register and the duty to guard against and facilitate the discovery of falsification.

In addition, a blockchain does not generate a "proper instrument of transfer" and does not comply with the current practical HMRC arrangements for payment of stamp duty. These are all points that have been considered before by the Registrars’ Group in the production of the industry model, something we can feed into the digitisation task force, as required.

Annual Report and Accounts – a Never-Ending Story 

The Quoted Companies Alliance (QCA) has published a report on the ever-growing size of annual reports and accounts, which is free to members, but a fee to download the report needs to be paid by non-members. However, some brief details are available on the QCA website.  

Read More: The never - ending story of annual reports 

The research has found that public company annual reports have increased in size by 46% in the last 5 years due to increased reporting requirements on remuneration and environmental, social and governance (ESG) issues and due to a failure to rein in repetition. The report states that the average report for a FTSE 100 company is 147,000 words long or 237 pages (longer than A Tale of Two Cities). On average 9 pages are added to the reports of FTSE 100 companies each year. For AIM companies with valuations under £250m the report has increased by 51% or six pages each year and average contains 44,000 words (longer than The Lion, The Witch and The Wardrobe). The QCA calls for an overhaul of current reporting requirements and better guidance so that companies can save time and money while making appropriate disclosures to investors and the wider stakeholder community. 

FCA approach to the generally accepted taxonomy

DTR 4.1.18R states that where annual financial reports contain consolidated annual financial statements that have been prepared in accordance with IFRS, in-scope companies must use a taxonomy generally accepted in the UK for financial disclosures in regulated markets.

The FCA is seeking to streamline their existing rules that require in-scope companies with securities admitted to UK regulated markets to prepare, publish and file with the FCA their annual financial report in an electronic format, and for the financial statement within it to be in a ‘structured digital format’.

This new process will enable the FCA to align more promptly with generally accepted taxonomies as new taxonomies are issued and adopted, and older, superseded taxonomies fall out of use.