PLC QTRLY - Q1 2023

This is our regular quarterly update to help our listed company clients and other market participants keep up to date with key developments relevant to issuers on the Main Market and AIM market of the London Stock Exchange.

Share capital: revised Investment Association share capital management guidelines

 On 13 February 2023, the Investment Association (IA) published a revised version of its share capital management guidelines, including the following amendments to the previous 2016 version:

• A new Section 1 (Introduction) reflects the recommendation in the Report of the Secondary Capital Raising Review that companies should continue to be able to seek annual allotment and pre-emption rights disapplication authorities from their shareholders of up to two thirds of their issued share capital, but with the authority extending to all forms of fully pre-emptive offers, such as open offers, and not just rights issues as had previously been the case. Notwithstanding this extension, IA members expect companies to explain why they have chosen their capital raising structure and why it is appropriate for the company and its shareholders, with some retail shareholders highlighting that rights issues continue to be their preferred method of fully pre-emptive capital raising. 

• Section 2 (Directors' power to allot shares) has been updated to support the new Pre-Emption Group Statement of Principles which allows annual authorities of up to 20% of the issued share capital and an additional 4% for a follow-on offer and which recognises the requirements of capital hungry companies to raise larger amounts of equity capital (see PLC QTRLY Q4 2022 for further details). IA members have asked the Institutional Voting Information Service (IVIS) to red top companies that seek a routine disapplication of pre-emption rights in excess of 24% of issued share capital or a disapplication of pre-emption rights which does not follow the Pre-Emption Group's template resolutions or include certain other confirmations required by the Statement of Principles. For companies who have disclosed in their IPO prospectus that they are a capital hungry company, IVIS will amber top pre-emption authorities in excess of the permitted 24%.

• Section 3 (Own share purchase) now includes a statement that companies should 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.

• Section 5 (Issuance of shares by investment trusts) now states that IVIS will red top pre-emption authorities greater than 20% of issued share capital (excluding shares held in treasury).

Corporate governance: Investment Association shareholder priorities for 2023

The IA has published its shareholder priorities for 2023. It has retained the existing four shareholder priorities of responding to climate change, diversity, audit quality and stakeholder voice, and also encourages companies to start reporting against the Taskforce on Nature-related Financial Disclosures. 

IVIS will take the following approach to assessing companies with year-ends starting on or after 31 December 2022 against its expectations in 2023.

Responding to climate change: In 2023, IVIS will continue to amber top all commercial companies that do not make disclosures against all four pillars of the Taskforce on Climate-related Financial Disclosure and will monitor a number of additional questions in relation to metrics and targets and scenario analysis.

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

Audit quality: For 2023, IVIS will separate the existing question of how companies judge the quality of the audit they have received into three parts to enable companies to provide targeted disclosures on how the audit committee has assessed the quality of the audit; how the auditor has demonstrated professional scepticism; and how the auditor has challenged management’s assumptions where necessary. Companies may choose to provide case studies to help illustrate these points. 

Diversity: For 2023, IVIS will: 

• Increase its existing diversity targets by 2%. 
• Red top FTSE 350 companies where women represent 35% or less of the Board or 30% or less of the Executive Committee and their direct reports. 
• Maintain its approach to red topping FTSE Small Cap companies where women represent 25% or less of the Board or 25% or less of the Executive Committee. 

IVIS will also assess whether companies are meeting the new Listing Rule requirement for companies to disclose on a comply or explain basis whether one of the four senior positions on the Board (Chair, SID, CEO or Finance Director) is held by a female but, at this stage, IVIS will not colour top on this issue. Investors are also interested in whether the drive for diversity is reflected across the wider workforce, and will increasingly be examining Gender Pay Gap data, and any voluntary reporting on the Ethnicity Pay Gap in order to ascertain this. 

IVIS is not changing its approach to Ethnic Diversity.For 2023, it will: 

• Red top FTSE 100 companies that have not met the Parker Review target of one director from a minority ethnic group. 
• Amber top FTSE 250 companies that do not disclose either the ethnic diversity of their board or a credible action plan to achieve the Parker Review targets by 2024.

Stakeholder engagement: IVIS will monitor and highlight areas of the annual report which reflect engagement with stakeholders on the cost-of-living crisis. 

HM Treasury and FCA complete review of criminal market abuse regime

 On 24 March 2023, HM Treasury and the FCA published a joint statement following completion of their review of the criminal market abuse regime, which sets out the UK's criminal sanctions for insider dealing and market manipulation.

The statement notes that the review identified a number of areas where the government believes it would be appropriate to update the criminal regime, although it does not give any details of the areas referred to. This sits alongside the government’s acceptance of the recommendations of the Fair and Effective Markets Review in relation to market abuse, where the government will lay secondary legislation in 2023. 

The review was undertaken within the wider context of regulatory reforms in financial services, known as the Future Regulatory Framework (FRF) Review. As part of the FRF programme, the government intends to repeal the Market Abuse Regulation, the civil market abuse regime, and replace it with UK-specific legislation. Changes to the criminal regime will be considered alongside any reforms to the Market Abuse Regulation through the FRF Review.

FCA guidance on D&I disclosures

The FCA has set out new guidance on disclosure requirements relating to diversity and inclusion (D&I) on company boards and executive management in Primary Market Bulletin No 44 (PMB 44).

The FCA notes that Listing Principle 1 (which requires a listed company to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable them to comply with their obligations) extends to establishing and embedding D&I reporting procedures, systems and controls in order to meet the listed company's obligations under the Listing Rules and Disclosure and Transparency Rules (DTRs). There is an expectation that listed companies retain records to support both the statement and numerical data disclosed in their annual financial reports (AFRs). PMB 44 also sets out a number of steps which the FCA expects listed companies to have considered in preparation for making the relevant D&I disclosures on a comply or explain basis.

As part of its supervisory work, the FCA intends to conduct periodic reviews of AFRs to determine whether listed companies are meeting their disclosure requirements under the new Listing Rules and amended DTRs (see our blog for further details). If they do not, the FCA may ask the company to take corrective action, such as enhancing their disclosures in subsequent AFRs. The FCA will also aim to identify areas of concern and disseminate examples of good practice through its periodic review work.

If a listed company fails to disclose diversity-related information or fails to provide a clear explanation in their AFR as required, the FCA will request that the company publishes this information via a Regulatory Information Service in line with the rules, as soon as possible after discovery. Any non-compliance will be viewed seriously and will lead to action using the full suite of powers, as well as sanctions, where appropriate. The FCA will also consider disclosures 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 matters.

Announcements with multimedia content

Primary Market Bulletin No 44 also sets out FCA guidance in relation to regulatory announcements with multimedia content, such as videos, noting that some primary information providers (PIPs) offer the ability for issuers to include multimedia content in regulatory announcements. 

The FCA outlines possible related risks in light of obligations under the Market Abuse Regulation and the DTRs for issuers not to combine the disclosure of inside information with the marketing of their activities and to communicate regulated information to the media in unedited full text. 

PIPs should consider the risk that issuers may disseminate regulated information in a non-compliant format and steps they can take to reduce the probability of this risk crystallising.

Parker Review update report on ethnic diversity on boards

 On 13 March 2023, the Parker Review Committee published an update report, indicating that as of December 2022, 96 FTSE 100 companies met the Parker Review target, with at least one minority ethnic director on their boards (up from 89 in 2021). FTSE 250 companies are also making progress towards the 2024 deadline of appointing at least one minority ethnic director.

The report also sets out new objectives, including:

• 50 of the UK’s largest private companies will be asked to provide ethnic diversity data from December 2023 and will have a target to have at least one ethnic minority director on their main board by December 2027.
• Both FTSE 350 companies and these 50 large private companies will be asked to set their own targets, by December 2023, for the percentage of their senior management group in December 2027 who self-identify as being in an ethnic minority. 

FCA consultation on streamlining transparency rules on structured digital reporting 

On 12 January 2023, the FCA published a consultation paper (CP23/2) on proposed changes to streamline its 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'.

Comments were requested by 24 February 2023. Subject to feedback and HM Treasury approval, the FCA intends to effect the proposals as soon as practicable.

Updated FRC ESG statement of intent

On 30 January 2023, the FRC published an updated statement of intent on environmental, social and governance (ESG) reporting. 

The update sets out areas in which there are ongoing challenges with ESG reporting, actions to address these, and the FRC’s planned activities in this area, and summarises the FRC's initiatives during the previous 18 months to assist and support its stakeholders and drive best practice.

ISSB agrees initial IFRS Sustainability Disclosure Standards

The International Sustainability Standards Board (ISSB) has agreed  that its initial International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards, S1 and S2, will become effective starting January 2024. 

At a meeting on 16 February 2023 in Montreal, the ISSB agreed the substance of the Standards and unanimously approved entering the drafting and formal ‘balloting’ process of the Standards, ahead of their expected issuance at the end of Q2 2023. 

ISSB members also voted to reference the European Sustainability Reporting Standards within an appendix to S1, as a source of guidance companies may consider, in the absence of a specific ISSB standard, to identify metrics and disclosures if they meet the information needs of investors.

HM Treasury announces terms of reference for Investment Research Review

On 9 March 2023, HM Treasury published the terms of reference for the Investment Research Review to consider the provision of investment research and its contribution to the competitiveness of the UK's capital markets. The Review was launched in response to concerns about the quality and quantity of investment research produced in the UK as compared to other jurisdictions. 

The Review formally started on 13 March 2023 and is mandated to report within three months.