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ESG - do your priorities need to change with a changing landscape?

In the wake of COP26 focus has been on climate related risks and disclosures – the E (Environmental) in ESG. However, public companies should be aware that the regulators have the entirety of ESG in their sights. We commented in our white paper of April this year on what ESG means. The FCA is clear on what it considers ESG to be and published its paper “A Strategy for Positive Change: our ESG priorities” on 3 November 2021. The FCA considers that its ESG strategy should be of particular interest to, amongst others, listed companies and their advisors, as well as firms regulated by the FCA and the PRA.

We attempt here to pull together forthcoming legislation and other initiatives which impact public and quoted companies. The focus is on climate-related financial disclosures as disclosure of how individual companies are tackling climate change is now a political imperative. However, there is also increasing focus on the other two limbs of ESG. ESG reporting and action plans should be on the agenda at every Board Meeting.

ESG Initiatives


The term ESG is often linked with the term Sustainability. The FCA says in its strategy paper that ESG captures the key dimensions of wider sustainability; that is people, planets, prosperity, and purpose.

E – Environment

This article focuses on E and in particular the Government’s Green Finance Strategy and the mandatory climate-related disclosures that public companies and large private companies will have to make. The “Say on Climate” initiative is also putting pressure on companies to include a vote on their climate change report at their AGM. E is the “planet” component of Sustainability.

S – Social

S is the people component of Sustainability and includes not only directors and employees but the individuals that a company interacts within the course of its business, including suppliers and customers, as well as the local neighbourhood.

In its ESG’s strategy paper, the FCA emphasised the importance of diversity and inclusion, in particular at the level of the board and senior management. In this PLC Update, David Hicks discusses the FCA’s proposal for enhanced diversity and inclusion targets and disclosure by listed companies. Glass Lewis has recently published its 2022 ESG Initiative Policy Guidelines, which include consideration of the ethnicity of board members and the use of environmental and social metrics on incentives for executive directors. ISS proposed benchmark policy changes for 2022 include, for UK companies, that boards will have at least one director from an ethnic minority background. On 1 November 2021, the Government announced it would back a new five-year review to monitor women’s representation in the upper rungs of FTSE companies.

G – Governance

G for many public companies means the corporate governance code they report to and, if UK incorporated, their S172 statements, under which they have to describe how the directors have regard to the matters set out in S172 (1) (a) to (f) Companies Act 2006 when performing their duty under S172 (to promote the success of the company for the benefit of the members as a whole). However, governance also goes to a company’s culture and the focus on G is moving from shareholders to stakeholders and the purpose of the company. A group of businesses (with the not-for-profit B LAB UK as secretariat) is pressing for a so-called Better Business Act which would seek to amend Section 172 to require directors to operate their company in a manner that benefits their stakeholders, including workers, customers, communities and the environment, as well as their shareholders. So far, there is no indication that the Government is minded to implement that amendment, but it is indicative of the general trend.

G can be described as the prosperity and purpose component of Sustainability.

UK’s Green Finance Strategy

The Government first set out its UK Green Finance Strategy (for transforming finance for a greener future) in July 2019 and its latest policy paper Greening Finance: A Roadmap to Sustainable Investing, published on 18 October 2021, sets out its ambition to “green” the UK’s financial system and align it with its net-zero commitment.

This was followed by the joint statement on climate change adaptation reports published by the PRA, the FCA, the Finance Reporting Council (FRC), and the Pensions Regulator on 28 October 2021. They expect that all companies should consider the likely consequence of climate change on their business decisions, in addition to meeting their responsibility to consider their company’s impact on the environment.

A Global Sustainability Disclosure Standard?

EU asset managers (and UK asset managers marketing their funds into the EU) now have specific sustainability disclosure requirements under the Sustainable Finance Disclosure Regulation. The EU is progressing its proposals for a Corporate Sustainability Reporting Directive which would apply to all large companies and companies listed on EU regulated markets. There are similar initiatives in the Americas and Asia. The risk is that companies with international businesses may face different reporting requirements in the different countries in which they operate. However, the IFRS Foundation announced the formation of the International Sustainability Standards Board on 3 November 2021 and published prototype climate and general disclosure requirements developed by its technical readiness working group. The intention is that the standards will facilitate compatibility with requirements that are jurisdiction specific. So the groundwork for a Global Sustainability Disclosure Standard for the financial markets has now been set.

Upcoming Legislative and Regulatory Changes

TCFD Companies Act amendments

We have written separately on the Government’s proposed Companies Act amendments that would require mandatory climate-related financial disclosures by listed and AIM traded companies with more than 500 employees, large LLPs, and large unquoted companies (whether plcs or private) for accounting periods commencing on or after 6 April 2022.

TCFD Listing Rule

There is some overlap with the FCA’s new Listing Rule (LR 9.8.6 R(8)) requiring annual reports to include TCFD aligned disclosures for commercial companies with a premium listing, which is to be extended to companies with a standard listing of equity shares (apart from shell companies and investment companies (whether standard or premium listed), whether or not they are domiciled in the UK, with effect for accounting periods commencing on or after 1 January 2022 (one year after premium listed companies). For the time being, the FCA proposes to maintain its “comply or explain” disclosure basis, but the expectation must be that disclosure will become mandatory, particularly now the IFRS has established the International Sustainability Standards Board.

The FCA has also issued for consultation a draft Technical Note TN 802.1 which sets out the FCA’s expectations for TCFD disclosures and the quality of the explanations where a company does not comply. It makes the point that it is ultimately for the listed company itself to ensure compliance while recognising that companies may seek the views of external auditors and other advisers when compiling their disclosures.

Overlap with the FRC

The FRC’s press release of 27 October 2021 makes it clear that they will be closely reviewing how companies report against the TCFD requirements. They say they expect material climate change policies, risks and uncertainties to be included in narrative reporting and appropriately considered and reflected in the financial statements.

The FCA addresses the overlap with the role of the FRC in PMB 36. As the disclosures required under LR 9.8.6R(8) and the proposed LR 14.3.27R (for standard listed companies) are deemed to be an ‘accounting requirement’, the FRC is responsible for keeping these disclosures under review. From 2022, the review of TCFD-aligned disclosures will be embedded into the FRC’s routine reviews of the annual financial reports of premium listed companies and, it is proposed, from 2023, would also be embedded into routine reviews of relevant standard listed company annual financial reports. The FCA would expect matters to be satisfactorily addressed through the FRC’s engagement with issuers, without the need for further action regarding the published disclosures. If the FRC is unable to reach a satisfactory conclusion through engagement, the matter will be referred to the FCA to take appropriate action.

In addition, the FRC will refer matters to the FCA which are identified as containing potentially false or misleading information, including the omission of material facts, likely to cause investor harm or which may breach other relevant FCA rules for environmental, social, and governance (ESG) matters (see Technical Note TN 801.1).

If a listed company fails to make a statement in their annual financial report regarding the disclosure of climate-related financial information under the TCFD framework, as required by the Listing Rules, then the FCA will request that a listed company publishes the TCFD statement via a Regulatory Information Service (RIS) in line with the Listing Rules as soon as possible after discovery. The FCA warns that any non-compliance will be viewed seriously and will lead to action using its full suite of powers, as well as sanctions, where appropriate.

Guidance from the FRC Lab and the LSEG

On 28 October 2021, the FRC’s Financial Reporting Lab published a report to help companies prepare for mandatory TCFD reporting, including the challenge in carrying out scenario analysis. And on 20 October 2021, the London Stock Exchange published its guide to climate reporting, based on the United Nations Sustainable Stock Exchanges’ Model Guidance on Climate Disclosure, which is in line with the TCFD recommendations.

An Opportunity?

While the many and potentially overlapping requirements may be disheartening, challenging, and potentially costly, not least in terms of management time, there are opportunities through their appeal to employees and investors alike, particularly those of Generations Y and Z, and so for increasing the talent pool and value of companies who both do, and are seen to be doing, the ‘right thing’.

This article is part of our biannual Public Company Update – sign up to receive this newsletter by clicking the subscribe button on the right. For more information on the above please contact Victoria Younghusband or your usual Charles Russell Speechlys contact.

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