Corporate governance | Key legal developments | April 2023

On 13 February 2023, the IA, who champion investment management, published its report on shareholder priorities for 2023.

The guidelines stated that the Institutional Voting Information Service (“IVIS“) (a leading provider of corporate governance research in the UK) will monitor companies with year-ends starting on or after 31 December 2022 against many matters, including:

• • Responding and accounting for climate change – directors are expected to consider the relevance of climate change and how this will affect their strategy moving forward. In addition, the transition towards net zero should be specifically considered when the board signs off on the company accounts to ensure that the valuation of assets is not overstated. Companies who do not make adequate climate related disclosures as part of the Task Force on Climate-Related Financial Disclosures (“TCFD“) Framework will be “amber topped” (i.e. flagged as being in significant breach). Companies are reminded that the narrative contained in their reports must be specific, i.e. they must disclose the methodologies used for setting measurable targets, pinpoint how the business has been impacted and track the company’s progress against such targets, as opposed to providing generic narratives. The aim of this is to help investors to analyse a company’s risk profile and for the company to demonstrate how climate change will impact its performance.

• • Audit quality – due to the importance of a company’s annual report, which provide investors with key financial information, companies should make disclosures in respect of how the auditor demonstrated professional scepticism, how the company assessed the quality of the audit including how the auditor challenged any assumptions from management (if any) in order to show that it is holding the board/management to account in the preparation of the annual report.

• • Gender diversity – IVIS increased its gender diversity targets by 2% and will “red top” (i.e. flag a company as being in breach showing the strongest concern) FTSE 350 companies where women represent 35% or less of the board, or 30% or less of the executive committee. In addition, it will continue to “red top” FTSE small cap companies where women represent 25% or less of the board or 25% or less of the executive committee.

• • Ethnic diversity – IVIS will continue to “red top” FTSE 100 companies that have failed to achieve the targets provided by the Parker Review (detailed below) – one director who self-identifies as a minority ethnic – and “amber top” FTSE 250 companies that do not disclose either the ethnic diversity of their board or a realistic plan to meet the relevant targets by 2024.

• • Stakeholder engagement – due to the increase in the number of issues that companies are required to disclose in the annual reports, boards are encouraged to develop their relationships with stakeholders to better inform their strategic decision-making. IVIS will monitor areas of the annual report which display engagement with stakeholders, particularly on the issue of the cost-of-living crisis.

What does this mean?

• • The guidelines from the IA highlight a continued drive towards the improvement of diversity and inclusion and holding companies to account in respect of social and environmental considerations, as well ensuring their auditing responsibilities are well considered.

• • Directors should consider the priorities and ensure the company’s annual report makes adequate disclosures in those key areas.

On 30 March 2023, the government published its updated Green Finance Strategy, providing a framework for action in respect of mobilising green investment in the UK. The strategy sets out the government’s proposals to deliver five key aims to attain the government’s goal of being a global leader on sustainable investment, including:

• • Investment opportunities – the government acknowledges that green finance and private investment will be vital to achieving net zero targets, and improving climate resilience. To achieve the UK’s net zero targets, it is estimated that an additional £50-60 billion capital investment will be required each year through to the 2030s.  The investment will support the technology and sustainable sectors and enable traditional sectors to adapt as part of the transition.

• • Financial stability – over 50% of global GDP is produced in sectors that rely on nature’s goods and services. The government’s framework will ensure that the finance sector has sufficient information required to balance risks associated with climate change and nature recovery.

• • Transition to Net Zero – at COP26, the UK made a commitment to become the world’s first net zero-aligned Financial Centre. The key mechanisms in place include UK financial institutions having a strong transition plan detailing how they will decarbonise as the UK achieves its net zero targets, and strong government supervision of the financial sector to ensure targets are realised.

• • Alignment with regulated markets – the government has confirmed it will work with financial regulators such as the Financial Conduct Authority (“FCA“), Bank of England, Pensions Regulatory and Environment Agency to ensure the UK’s regulatory framework supports sustainable investment.  Progress will only really be effectively measured by implementing key performance indicators covering topics such as quality and quantity of reporting on sustainability and size of green finance markets. Consultation with regulated organisations will help the government to achieve parity between listed and private companies and ensure consistent reporting requirements across the economy.

• • Scope 3 greenhouse gas (“GHG“) emissions – indirect GHG emissions resulting from an organisation’s activities that the organisation does not control (i.e. scope 3 GHG emissions) should be reported on to aid the government’s understanding on this output.

• • Green taxonomy – certain economic activities will be labelled as “green” to assist investors and support the standards, labels and disclosures for green financial products. The government proposes to include nuclear within the green taxonomy, as it announced in the Spring Budget (subject to its consultation in Autumn 2023). Thereafter, there will be an expectation on companies to report, proportionately taking into account the relevant company’s size and scale, on the taxonomy (i.e. classification) on a voluntary basis for two years.

• • Fiduciary duties – the government will consult on the introduction of requirements for the UK’s largest companies to disclose net zero transition plans if they have them. The proposals for private companies will align with the FCA’s requirements for listed companies to disclose transition plans on the comply and explain basis.

What does this mean?

The consultation planned for Autumn 2023 will be an important period for organisations to review their sustainability approach.

On 11 April 2023, the Home Office confirmed that the forthcoming Economic Crime and Corporate Transparency Act will be introducing a failure to prevent fraud offence. This means that if an employee or agent commits an offence under the Fraud Act 2006, section 993 of the Companies Act 2006 in respect of fraudulent trading, the Theft Act 1968 or cheating the public revenue, in-scope organisations (large companies, not for profit organisations and incorporated public bodies) may be held accountable, facing an unlimited fine. Large companies are those meeting two out of three of the following criteria: (i) more than 250 employees; (ii) more than £36 million turnover; and/or (iii) more than £18 million in total assets.

What does this mean?

In preparation for this new legislation, organisations will need to ensure they have robust policies and procedures in place, coupled with adequate training for employees, to manage the prevention of fraud in order to protect themselves against the risk of claims. Organisations should ensure that they have appropriate measures in place to detect fraud so that the relevant action can be taken. The published proposals suggest that the guidance will be in line with bribery prevention.

Please find some recently released articles on the topic here and here.