Included in this issue of our Governance & Compliance Update: PLSA publish Stewardship and Voting Guidelines, FRC advise on coronavirus, BEIS and FRC publish letter on accounting and corporate reporting and more

PLSA publishes Stewardship Guide and Voting Guidelines 2020

The Pensions and Lifetime Savings Association (PLSA) has published the 2020 version of its Stewardship Guide and Voting Guidelines (Guidelines). The Guidelines have been extensively updated in light of the revised disclosure requirements of the Stewardship Code, so as to "help owners hold their [scheme] managers and service providers to account" and now include checklists on stewardship, engagement and voting. It follows the publication of the PLSA 2019 AGM Voting Review published in January.

The substantially revised Voting Guidelines now include separate sections on "Climate Change and Sustainability", and "Capital Allocation and Structure". A final section encourages investors to "take a step back" and assess each company holistically, in line with the PLSA's Corporate Governance Policy. Within each section, the PLSA sets out its views on:

  • What good company behaviour looks like.
  • What the relevant resolutions are in each case.
  • How investors should consider voting (including appropriate resolutions for escalation). 

The PLSA has also published a summary of its voting recommendations on an issue by issue basis.

According to the PLSA, the "toughened-up" section on climate change and sustainability reflects pension schemes’ heightened focus on ESG and the growing number of climate-related resolutions tabled at AGMs.

The PLSA believes that climate change is a systemic issue affecting nearly every industry and nearly every firm. Although climate change will impact some sectors more than others, it is likely that most companies will need to assess its impact on their strategy and business model.

The Guidelines state investors should consider voting against the re-election of a responsible director or the re-election of the Chair if:

  • Shareholders have attempted to engage on the issue and yet companies have still failed to demonstrate effective board ownership, for example providing a detailed risk assessment and response to the effect of climate change on the business, or incorporating appropriate expertise on the board.
  • The business is "large", and is not already moving towards disclosures consistent with Taskforce for Climate-related Financial Disclosure recommendations (TCFD), the Carbon Disclosure Project (CDP), the Sustainability Accounting Standards Board (SASB) or another established third party framework, and smaller businesses are not readying themselves at a pace proportional to the resources available.
  • The business has operations which are "highly carbon intensive" and has not made sufficient progress in providing the market with investment relevant climate disclosures including committing to publish science-based targets.
  • The company has not listened to investor concerns about any direct or indirect corporate lobbying activity whose objectives are considered to frustrate climate change mitigation.
  • The company has not responded appropriately to the result of a climate change related resolution, whether binding or not, and whether it was actually passed or not.

IA publishes 2019 voting trends analysis

The Investment Association (IA) has published analysis of voting trends during the 2019 AGM season. The analysis highlights the fact that: 

  • 158 FTSE companies were added to the public register as regards 298 resolutions compared with 151 companies (294 resolutions) in 2018. 39 companies appeared on the register for the same resolution as last year.
  • Executive pay continued to feature at the top of investors' concerns with 62 companies appearing on the register in 2019 for pay-related resolutions. In particular, 31 FTSE 250 companies appeared on the register for such resolutions – an increase of over 29%.
  • Opposition to individual director re-election also remained a key theme, with the number of resolutions against individual directors remaining constant at 103 in 2019 (2018: 105).
  • As the register reaches its third year, companies are doing more to acknowledge shareholder dissent, with over 80% of companies now making a public statement acknowledging concerns and outlining how they plan to engage with shareholders – an increase from 55% in the first year.

Climate change: FRC to assess company and auditor responses to climate change

The Financial Reporting Council (FRC) has announced a review of how companies and auditors assess and report on the impact of climate change while considering how the quality of information can be improved to support informed decision-making by investors and other stakeholders. The FRC will:

  • review a sample of company reports across industries to assess the quality of their compliance with reporting requirements in relation to climate change;
  • assess a sample of audits to review how auditors are ensuring the impact of climate risk has been appropriately reflected in company reports, including the key areas of judgement and related disclosures;
  • assess the resources available within audit firms to support audit teams in evaluating the impact of climate change; 
  • evaluate the quality of disclosures under the new UK Corporate Governance Code regarding risk, emerging risk and long-term factors affecting viability; and
  • evaluate whether the Financial Reporting Lab’s recommendation for companies to report in line with the TCFD framework has been adopted, highlighting developing good practice.

The FRC will also consider how investors are addressing the climate challenge in the stewardship of their investments and in their response to systemic and market risks when it monitors the first reports under the Stewardship Code, which will be issued from the beginning of 2021.

FRC advice on coronavirus risk 

The FRC has published guidance for companies on the disclosure of risks and other potential reporting consequences arising from the emergence and spread of Coronavirus. It has also been discussing with audit firms whether the virus affects their ability to review component audits in China and the consequences to delivering timely audit opinions.

Brexit: BEIS and FRC publish letter on accounting and corporate reporting

The Department of Business, Energy and Industrial Strategy (BEIS) and the FRC have published a joint letter to the accounting sector and firms on the implications of Brexit during and after the transition period (TP). The letter also includes Frequently Asked Questions. The main points to note include:

  • During the TP there is no change to the UK’s accounting and corporate reporting framework.
  • The view of BEIS and the FRC is that the status of UK auditors after the end of the TP is likely to be subject to negotiations. 
  • The UK will seek equivalence on accounting and audit, and adequacy in relation to audit, from the EU Commission. It is expected that the assessments will be concluded by June 2020, with the UK and EU assessing each other’s equivalence and adequacy in parallel. 

For UK public companies with a UK listing for financial years straddling exit day:

  • For financial years beginning during the TP, they will continue to use EU-adopted IAS, including any new or amended standards adopted by the EU during the TP. 
  • Where new or amended standards are adopted by the UK after the TP but before those companies file their accounts for the relevant financial years, it is intended that they may either: (i) continue to use EU-adopted IAS as at the end of the TP; or (ii) choose to apply the new UK-adopted IAS, which will include the new or amended standards adopted by either the Secretary of State or the UK Endorsement Board, as relevant. Regulations to permit the second option are likely to be laid in Parliament in the coming weeks. 

The FRC's website contains further information on the impact of the UK's exit from the EU on accounting and audit.

FRC issues guidance on its revised Ethical Standard

We covered the FRC's revision of its Ethical Standard in G&C update – Issue 149 and the publication of a revised Glossary of Terms in relation to Auditing and Ethics to include a definition of "Other Entity of Public Interest" in G&C update – Issue 152.  The FRC has now published implementation guidance dealing with:

  • Transitional periods: The Ethical Standard has an effective date of 15 March 2020, with transitional provisions for engagements relating to the audit of earlier financial periods, and for non-audit or audit-related services, for which an engagement letter has been agreed and for which work is already underway prior to the effective date, to be completed in accordance with the terms of the original engagement letter. As to the status of non-audit or audit-related services which have not been engaged for or started prior to 15 March 2020, but which relate to a financial period which commences prior to 15 March 2020, the FRC is of the view that an "objective, reasonable and informed third party" would be likely to conclude that it would be inappropriate to enter into an engagement for the provision of a service that was not included in the list of permitted services. 
  • Other Entities of Public Interest: The auditor of a portfolio company held by a private equity or venture capital fund that meets the definition of an OEPI, may only provide non-audit or audit-related services to that entity which are included on the list of permitted services in the Ethical Standard. The same requirement applies to any controlled undertakings held by that entity and to its UK parent. Given the exclusion of fund management entities contained within a private equity or venture capital limited partnership structure from the definition of OEPI, the requirement in respect of providing services to the UK parent applies to services in respect of, or relevant to the OEPI itself, or its subject matter. Other services provided to the UK parent by the OEPI auditor can only be provided after the audit firm has undertaken an assessment of threats to independence and applied any necessary safeguards to address this.

FCA issues guidance ahead of launch of new NSM portal

The Financial Conduct Authority (FCA) has updated its designated webpage ahead of the launch of the new National Storage Mechanism (NSM) portal, when it will take over from Morningstar as NSM operator. The FCA is also making changes to its Electronic Submission Service (ESS) to enable issuers and their representatives to upload regulated information. Key issues to note include:

  • Each uploader will need an ESS account. They will also be required to provide proof that they have issuer authorisation to file regulated information.
  • The FCA will send issuers a link to the new NSM portal before its launch. Issuers should continue to use the existing Morningstar portal in the meantime. 
  • Those without an ESS account will need to apply for one, particularly those who think they will need to upload a document in April, May or June 2020. Each person who requires access must register separately.
  • All those submitting information will need to be authorised to do so by the relevant issuer by application through the ESS. The FCA has provided a template letter for this purpose.

Key Contacts

Richard Preston

Richard Preston

Managing Associate, Corporate Finance
London, UK

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Jack Edwards

Jack Edwards

Managing Associate, Corporate Finance
London, UK

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