EQ Bulletin – February 2021

Articles in this Edition cover:

• Listing Rule changes implement climate-related disclosure requirements
• FRC publishes accounting standard amendments for UK exit from EU
• FRC consultation on standards for audit firms’ quality management systems
• FCA publishes EU exit-related amendments to its Handbook
• Companies House issues guidance on scams
• Responses from the QCA and PLSA on reform of the listing regime
• Blackrock 2021 Proxy Voting Guidelines published
• Aviva publishes its 2021 Global Voting Policy
• Investment Association publishes its 2021 Shareholder Priorities
• QCA review of smaller company governance committees
• BEIS strengthens the Prompt Payment Code

Dates for your diary:

The EQ Circle - Thursday 25 February
The EQuivalence Forum - Wednesday 9 June and Wednesday 15 September

Did you miss the latest Equivalence Forum? You can find the webinar on demand here.

Listing Rule changes implement climate-related disclosure requirements

The Financial Conduct Authority has published a Policy Statement (PS20/17), a final rule and guidance for companies in order to promote better climate-related financial disclosures.  A new Listing Rule, LR 9.8.6 (8), requires all commercial Premium listed companies to include a statement in their annual report setting out:

• Whether they have made disclosures consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures(TCFD);
• Where they have not made disclosures with some or all of the TCFD’s recommendations, an explanation of why and a description of any steps they are taking or plan to take to be able to make consistent disclosures in the future including relevant timeframes;
• Where they have included some, or all, of these disclosures in a document other than their annual financial report, an explanation of why;
• Where in their annual financial report (or other document) the disclosures can be found.

The new Listing Rule is accompanied by guidance to help companies assess whether their disclosures meet the TCFD recommendations. It also clarifies circumstances in which companies may explain rather than disclose.

The new Listing Rule applies to accounting periods beginning on or after 1 January 2021.

The Policy Statement also includes a new Technical Note ‘Disclosures in relation to ESG matters, including climate change’.  The Technical Note sets out that the disclosure requirements of the Market Abuse Regulation, Disclosure Guidance and Transparency Rules (DTR) and Listing Rules may already require the disclosure of Environmental, Social and Governance (ESG) matters.  For example the requirement to disclose a company’s principle risks and uncertainties under the DTR. The Technical Note applies with immediate effect.

Policy Statement (PS20/17)

FRC publishes accounting standard amendments for UK exit from EU

The Financial Reporting Council (FRC) has published changes to accounting standards that will apply to accounting periods beginning on or after 1 January 2021.  The changes are necessary to ensure legal references and terminology used to reflect the UK’s exit from the EU.

FRC article

The FRC has also issued guidance for companies and auditors where a company has a financial year which straddles the end of the transition period. 

FRC guidance

FRC consultation on standards for audit firms’ quality management systems

The Financial Reporting Council (FRC) has published a consultation on proposals for the revision of standards for an audit firm’s responsibilities to design, implement and operate a system of quality management. The FRC proposes to adopt International Standards on Quality Management.  The new approach is on proactively identifying and responding to risks to quality.

FRC article

FCA publishes EU exit-related amendments to its Handbook

The Financial Conduct Authority (FCA) has published further EU exit-related amendments to its Handbook to prepare for the end of the transition period.  The FCA also has a new Handbook site (which includes the Listing Rules).

FCA article

Companies House issues guidance on scams

Companies House has issued guidance on various scams that companies may be subject to by email or telephone from people purporting to be from Companies House and asking for details of Directors’ information or payments.

Companies House guidance

Responses from the QCA and PLSA on reform of the listing regime

The Quoted Companies Alliance (QCA) have published their response to Lord Hill's review of the listing regime.   Given the decline in the number of companies listing on the UK's equity markets over the last 20 years the QCA is calling for:

• The current Standard Listing of the London Stock Exchanges' Main Market to be replaced with a Nasdaq-like market
• This would have a more flexible approach on policies such as free float and prospectus requirements
• AIM would continue as would the Premium Listing for the lowest risk investors

QCA response

The Pensions and Lifetime Savings Association (PLSA) has also published its response to Lord Hill's review.  The PLSA states that it opposes any changes to the Premium Listing rules that reduce corporate governance standards.  This, in particular relates to any reduction in the free float requirements and introduction of dual-class share structures.

PLSA response

Blackrock 2021 Proxy Voting Guidelines published

Blackrock has published its Proxy Voting Guidelines for 2021.  The changes in voting policy focus on board quality, a transition to a low-carbon economy, key stakeholder interests, diversity and inclusion.  Blackrock expects companies to demonstrate:

• Board and workforce diversity
• Plans to align their business with the global goal of net-zero GHG emissions by 2050
• An understanding of key stakeholders and their interests

Blackrock have also reported on a review of the effectiveness of voting against directors, particularly on remuneration issues, and concluded that this is an effective tool.

Blackrock voting guidelines

Aviva publishes its 2021 Global Voting Policy

Aviva has written to the Chairs of companies in which it invests setting out its focus for 2021 and published its 2021 Global Voting Policy.  Aviva highlights the issues that will guide Aviva’s voting intentions which include:

• Stakeholder business models – companies must ensure a link between its corporate purpose, strategy, stakeholder welfare and board decision making.
• Diversity and social inclusion – the Board should reflect gender, ethnicity and social back grounds in its makeup. The Board should have at least one racially diverse director, and there should be a strategy to increase the number of ethnically and socially diverse employees in senior management. Companies should publish ethnicity data, including ethnic pay gaps.
• Executive remuneration – executive incentives should be aligned with shareholder outcomes. Management should not benefit from unjustified windfall gains on vesting of long term incentive awards linked to market sentiment. There should be a commitment to paying employees at least the living wage.  
• Climate change – companies should adopt a target to achieve net-zero emissions by 2050 and integrate climate goals into strategy and financial targets. Companies should publish a transition roadmap including short and medium-term climate targets and report on progress using the Taskforce on Climate-related Financial Disclosures framework and consider providing investors with an advisory vote on the report.
• Effective dynamic leadership – Companies should ensure boards and senior management teams have the right balance of skills and experience, foster a corporate culture that is dynamic and forward-looking, be bolder in taking decisive action to revise strategy, reorganise or reallocate capital to maintain competitiveness, regardless of short term repercussions.

Aviva Global Voting Policy

Investment Association publishes its 2021 Shareholder Priorities

The Investment Association has published its Shareholder Priorities for 2021.  The IA state that the four areas identified in 2020 as investor priorities – climate change, audit quality, stakeholder engagement and diversity – remain priorities for 2021.  However, there will be a greater focus in 2021 on:

• Capital management and accounting for climate-related matters
• COVID-19 specific stakeholder engagement
• Plans to meet Parker Review targets for ethnic diversity on boards

Voting policies for 2021 include:

• Climate change: All companies in high-risk sectors that do not address all four pillars of the Task force for Climate-related Disclosures (TCFD) will receive an Amber Top on the ESG report
• Ethnic diversity: Companies in the FTSE 350 that do not disclose either the ethnic diversity of the Board or a credible action plan to achieve the Parker Review targets will receive an Amber Top on the Corporate Governance Report
• Gender diversity FTSE 350: Companies that have female representation of 30% or less on their Board or 25% or less in their Executive Committee and its direct reports will receive a Red Top on the Corporate Governance Report
• Gender diversity FTSE SmallCap: Companies that have female representation of 30% or less on their Board or 25% or less in their Executive Committee and its direct reports will receive an Amber Top on the Corporate Governance Report

The Shareholder Priorities 2021 also sets out a review of 93 FTSE 100 companies against the 2020 priorities and performance against them and expectations for the 2021 AGM season.  Key highlights are:

• Climate change: The number of companies in the FTSE 100 reporting against some of the TCFD increased from 30 in 2019 to 77 in 2020. For 2021, investors expect all listed companies to report in line with TCFD.
• Accounting for climate change: Directors should affirm that the financial impact of climate-related matters have been incorporated into the accounts by providing a statement in the Annual report that the directors have considered the relevance of the risks of climate change when preparing and signing off the accounts.
• Audit quality: Audit quality disclosures were disappointing in 2020. 94% of FTSE 100 companies failed to provide evidence of how they assessed quality of the audit and 22% demonstrated how the audit committee challenged management’s judgement. The IA expects companies to demonstrate how they have judged audit quality in 2021 reporting.
• Stakeholders: Companies generally identified key stakeholders and how they engaged with them. The IA’s 2020 review showed various approaches to workforce engagement in the FTSE 100:
  • Formal workforce advisory panel – 26%
  • Designated Non-Executive Director – 40%
  • Alternative arrangements – 32%
  • Other – 2%

For 2021 investors expect quality disclosures on the approach to engaging, communicating and supporting the company’s stakeholders during the pandemic.

• Diversity: Improvements in gender diversity. There is now only one all-male Board in the FTSE 350.  However, there was little progress on ethnic diversity.  37% of FTSE 100 companies still do not have any ethnic minority representation on their boards.  Actions are needed urgently to appoint at least one director from an ethnic minority background by 2021 on FTSE 100 boards and by 2024 on FTSE 250 boards.

IA’s Shareholder Priorities

QCA review of smaller company governance committees

The Quoted Company Alliance has published a review in conjunction with YouGov of small and mid-cap companies looking at what types of governance committees they have.  The results were:

• Remuneration Committee – 97%
• Audit Committee – 97%
• Nominations Committee – 78%
• Risk Committee – 34%
• Operations Committee – 13%
• ESG Committee – 11%
• Other – 11% (mostly a Disclosure Committee)

QCA review

BEIS strengthens the Prompt Payment Code

The Department for Business, Energy and Industrial Strategy (BEIS) has announced changes to the Prompt Payment Code (the Code) in order to crack down on late payments to small businesses.  The Prompt Payment Code was set up by BEIS to encourage best practice in paying suppliers and has nearly 3,000 signatories.  The changes coming into effect immediately include:

• The CEO, Finance Director or business owner must personally sign the Code
• Introduction of a new logo for signatories to use in communications
• Acknowledgment as a condition of signing the Code that suppliers can charge interest on late invoices

In addition, from 1 July 2021, it will be a requirement for signatories to pay 95% of invoices from small businesses within 30 days.  It will remain a requirement to pay 95% of larger businesses within 60 days. 

Government publication