Directors' know how: what you should know about the upcoming changes

23rd February 2017

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Directors' know how is a monthly article, which highlights key rule changes, proposed changes and market updates so that you know what is coming down the track.

London Stock Exchange issues guidance on good practice in Environmental, Social and Governance reporting

The London Stock Exchange has published guidance on good practice in Environmental, Social and Governance (ESG) reporting. It seeks to help companies understand what ESG information investors would like to see provided, with the aim of encouraging a more consistent approach to ESG reporting.

The guidance sets out eight reporting priorities for effective ESG reporting:

  • Strategic relevance – Companies should explain how ESG factors are relevant to their business model and strategy, as well as make clear the actions they are taking to either benefit from these factors or mitigate the risks associated with them.
  • Investor materiality – Companies should explain which ESG issues are the most relevant or material to their business and highlight their potential impact on their business. Companies should illustrate how these impacts could affect business strategy and financial performance.
  • Investment grade data – Data must be accurate, timely and aligned with a company’s fiscal year and business ownership model, as well as consistent with global standards to facilitate comparability. Companies should provide a balanced view of the data.
  • Global frameworks – Companies could consider frameworks from the following organisations, as frequently cited by investors: the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB).
  • Reporting formats – Companies should weigh the advantages and disadvantages of presenting ESG information in an integrated report or in a standalone sustainability report with respect to their own needs and those of their investors.
  • Regulation and investor communication – Instead of taking a minimum compliance approach, companies should use regulatory requirements as an opportunity to develop an investor-focussed approach to reporting, by ensuring that they account for their most material issues.
  • Green Revenue reporting – Companies should communicate their exposure to the green products and services that enable the transition to the low carbon economy.
  • Debt finance – Companies issuing green bonds must ensure that the proceeds are fully directed towards green projects, information on the use of proceeds is published regularly and that there are clear criteria for project selection and evaluation.

ICSA: The Governance Institute publishes first report on the future of UK corporate governance

ICSA: The Governance Institute has published the first report of its “The Future of Governance” series, which seeks to review some of the principal issues affecting governance and provide potential solutions to them.

‘Untangling corporate governance’ highlights that the definition of corporate governance has evolved in the 25 years since the first corporate governance code was established in the UK to broaden its scope and purpose. It suggests that although the framework – shaped by the 'comply or explain' approach and supported by public reporting by companies and enforcement by shareholders – continues to serve its original purpose, more can be done to help it meet its other objectives.

The report cites the UK corporate governance framework’s inability to prevent, or effectively sanction, bad behaviour by boards or directors, as well as the wider public policy objectives, such as good business practices and the sufficient promotion of the public interest. It argues that the different components of corporate governance need to be untangled, in order for them to be effectively addressed.

The report recommends the following actions:

  • Rethinking the policy approach to issues such as income inequality and equal opportunities – These should be tackled with respect to the whole economy using tools better suited to the purpose;
  • Promoting and encouraging good governance standards across all sectors – This includes other investment asset classes that receive a significant amount of money from UK investors;
  • Improving the effectiveness of the various mechanisms by which listed companies are held to account; and
  • Introducing effective legal sanctions, which are proportionate and justified, to punish bad behaviour.

PLSA publishes corporate governance and policy guidelines

The Pensions and Lifetime Savings Association (PLSA) has published a revised version of its Corporate Governance and Policy Guidelines 2017. The guidelines seek to help its members promote the long-term success of the companies they invest in and ensure that the board and management of those companies are accountable to shareholders.

The new guidance makes the following revisions from the last publication in 2015:

  • Executive pay – Company remuneration policies should be mindful of wider societal expectations. Remuneration committees should take a critical and challenging approach to pay increases and be prepared to exert downward pressure on executive pay. Pay policies likely to result in awards that could bring the company into public disrepute or foster internal resentment, owing to their excessive value and/or overly generous incentives and rewards justify a vote against the remuneration policy. Such a vote against a remuneration policy should also be accompanied by a vote against the remuneration committee chair, if they have been in post for over a year.
  • Increasing diversity – Companies must take into account the 2015 Davies review's target of ensuring of 33% of women on FTSE 100 boards. If there is no clear evidence that boards are doing so, then investors should consider voting against the chair or, if not the same individual, the chair of the nominations committee.
  • Accountability – Companies should also ensure that they are sufficiently reporting their company culture, the stability, skills and engagement levels of their workforce and their working practices.
  • Leadership – Boards should, in addition to being accountable to shareholders for protecting and generating sustainable value over the long term, be aware of a director’s requirement under the Companies Act 2006 to have regard to other stakeholders, including workers, customers, suppliers, wider society and the environment.

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