This article is the first of a series looking at UK policy and legal developments in relation to environmental, social and governance (ESG) issues. For further information on any of these issues, please contact Tom Hine (tom.hine@kempitlaw.com) or your usual firm contact.

Environmental

1. Creation of UK Sustainability Disclosure Standards

On 2 August 2023 the UK Department for Business and Trade announced its plans to create UK Sustainability Disclosure Standards (“SDS”) by assessing and endorsing the global corporate reporting baseline of IFRS Sustainability Disclosure Standards. The SDS will be based on the IFRS standards to ensure that the disclosed information can be compared globally. They are expected to only divert from the global baseline if absolutely necessary for UK specific matters.

The SDS, which are expected to be developed by July 2024, will set out corporate disclosures on the sustainability-related risks and opportunities that companies face. They will form the basis of any future requirements in UK legislation for companies to report on risks and opportunities relating to sustainability matters, including those arising from climate change.

Following implementation of the SDS, decisions to require disclosure will be taken by the FCA in respect of listed companies and by the UK government in relation to UK-registered private companies and limited liability partnerships.

2. Taskforce on Nature-Related Financial Disclosures

The Taskforce on Nature-related Financial Disclosures (TFND) has published the final version of its recommendations for a disclosure framework. The 14 TNFD Recommendations provide guidance for organisations to report on nature-related financial risks and opportunities, to support a shift in global financial flows away from nature-negative outcomes and towards nature-positive outcomes. They are designed for organisations of all sizes, across all sectors and along value chains. The disclosure framework is voluntary, although the nature-related disclosures may eventually follow the sustainability disclosures framework and be implemented into national law.

3. Workiva Global ESG Practitioner Survey

A recent report commissioned by Workiva Inc., the 2023 Global ESG Practitioner Survey, suggested that 90% of the organisations surveyed considered that having a strong ESG reporting program in place would give their companies a competitive advantage in the next two years. Despite a clear increase in ESG-specific structures within organisations, companies are experiencing a growing demand to formalise their ESG policies and strengthen their ability to report on ESG financial metrics. 71% of respondents say three or more internal teams are involved in their company’s ESG reporting processes, and 74% say they expect their organizations will be required to comply with two or more global regulations.

4. Climate transition plans: TPT final disclosure framework and implementation guidance

On 9 October 2023, the Transition Plan Taskforce (TPT) published its final framework for disclosure of private sector transition plans (TPs). The TPT also published implementation guidance, a consultation on a sector summary (covering 40 sectors), technical mapping showing how the TPT framework relates to other key disclosure frameworks and legal considerations for companies drawing up TPs, including in relation to directors’ duties.

The final framework is based on the TPT’s November 2022 consultation draft. The framework sets out best practice guidance on TP disclosures. It recommends disclosures in 19 areas, grouped under the broad headings of foundation, implementation strategy, engagement strategy, metrics and targets, and governance. The UK government is expected to launch a consultation on TP disclosure requirements for large public and private companies in winter 2023.

5. FCA Sustainability Disclosure Requirements

Following concerns that some firms may be making misleading or exaggerated sustainability-related claims about their investment products, the FCA has announced it is introducing a package of measures to help consumers navigate the market for sustainable investment products. PS23/16 includes:

• An anti-greenwashing rule for all FCA-authorised firms to reinforce that sustainability-related claims must be fair, clear and not misleading. The FCA is also consulting on supporting guidance. These rules come into force on 31 May 2024 and will apply to all FCA-authorised firms who make sustainability-related claims about products and services.
• Naming and marketing rules for investment products, to ensure the use of sustainability-related terms is accurate. These rules come into force on 2 December 2024 and apply to UK asset managers.
• Four labels to help consumers navigate the investment product landscape and enhance consumer trust. Firms can begin to use these labels, with accompanying disclosures, on 31 July 2024. The rules apply to UK asset managers.
• Consumer-facing information to provide consumers with better, more accessible information to help them understand the key sustainability features of a product. These rules come into force on 2 December 2025 and apply to UK asset managers.
• Detailed information targeted at institutional investors and consumers seeking more information in pre-contractual, ongoing product-level, and entity-level disclosures. These rules come into force on 2 December 2026 and apply to UK asset managers.
• Requirements for distributors to ensure that product-level information (including the labels) is made available to consumers.

The FCA has also introduced targeted rules for the distributors of investment products to retail investors in the UK.

Social

6. UK Government announces changes to employment laws

The UK government is making certain changes to employment laws from 1 January 2024. The changes relate primarily to holiday and record keeping requirements under the Working Time Regulations. The government is also preserving some other EU-derived rights that workers might otherwise have lost under the Retained EU Law (Revocation and Reform) Act.

The most significant changes to the Working Time Regulations will:

• Provide that irregular hours or part-year workers accrue annual leave on the basis of 12.07% of hours worked during each pay period, rounded up or down to the nearest hour. 
• Permit employers to adopt rolled-up holiday pay arrangements for irregular hours or part-year workers, by way of a 12.07% uplift to the worker’s remuneration.
• Amend record keeping requirements to provide that an employer is obliged to keep records that are adequate to show that it has complied with the rules on maximum weekly working time, night work and health assessments “in such manner and format as the employer reasonably thinks fit”. The Regulations will specifically state that an employer does not need to record each worker’s daily hours if it can demonstrate compliance in some other way.

Governance

7. New UK laws to fight corruption, money laundering & fraud

The Economic Crime and Corporate Transparency Act 2023 received Royal Assent on 26 October. The Act covers companies house reform, limited partnership reform, money-laundering, powers to seize and recover suspected criminal cryptoassets, spurious lawsuits, and corporate criminal liability. Different parts of the Act will come into force at different times over the coming months as appointed by the Secretary of State or the Lord Chancellor. In ESG terms, the most relevant sections are as follows:

Companies House reform

A key section of the Act is aimed at overhauling the role of Companies House and improving transparency over UK companies. The changes include:

• all existing and new company directors and persons with significant control will be required to verify their identity with Companies House;
• Companies House will have new powers: (a) to check, remove or decline information on the register; (b) to investigate and enforce breaches powers; (c) to cross-check data with other public and private sector bodies; and (d) to share information with law enforcement bodies; and
• Broader reforms to clamp down on misuse of corporate entities.

Strengthening anti-money laundering powers

The Act strengthens anti-money laundering powers, improving information sharing on suspected money laundering, fraud and other economic crimes. Businesses will be able to share information more easily for the purposes of preventing, investigating or detecting economic crime by disapplying civil liability for breaches of confidentiality for firms who share information to combat economic crime.

Corporate Criminal Liability

The Act includes a new offence of failure to prevent fraud. This is designed to address companies profiting from fraud committed by their employees. An organisation will be liable where a fraud offence is committed by an employee or agent, for the organisation’s benefit, and the organisation did not have reasonable fraud prevention procedures in place. An update to a legal principle known as the ‘identification doctrine’ will also ensure businesses can be held criminally liable for the actions of their senior managers who commit an economic crime.

8. Proposed Additional UK Corporate Reporting Obligations Withdrawn

On 16 October 2023, the UK government withdrew the draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations.

The regulations, which formed part of the wider proposals to reform the UK audit and corporate governance regulatory landscape, were laid in Parliament on 19 July 2023. They would have introduced the following additional reporting requirements for UK companies with at least 750 employees and an annual turnover of £750 million or more:

• an annual resilience statement, setting out how a company is managing risk and building or maintaining resilience over the short, medium, and long term;
• a triennial Audit and Assurance Policy Statement, explaining how the company proposes to assure non-financial reporting over the following three years as well as providing an annual update on the implementation of the policy;
• an annual statement about distributable profits and the company’s policy on distributions; and
• an annual statement on steps taken to prevent and detect material fraud.

The UK government announced in its press release that the regulations would be withdrawn after consultation with companies raised serious concerns about the negative impact of additional reporting requirements on both existing and potential users of the UK capital markets. Instead, the Business Secretary will provide options to reform the wider framework to reduce the burden of red tape on businesses.

9. FRC calls for more outcomes-based reporting

The Financial Reporting Council has published its latest annual review of corporate governance reporting. The review outlines areas where the FRC would like to see improvement as well as giving examples of good reporting and insights into corporate governance trends. 

10. FRC Audit Committees and the External Audit: Minimum Standard

The FRC has announced the release of its Audit Committees and the External Audit: Minimum Standard. The minimum standard for audit committees will be on a voluntary basis initially whilst legislative change is implemented to require adoption by FTSE350s; however, it sets a benchmark for audit committee behaviour for all to consider. 

The key components of the minimum standard for audit committee responsibilities are as follows:

• Requiring that the company manages non-audit service providers to ensure that it has a fair pool of auditors from which to run an audit tender process.
• Conducting the audit tender process, including transparent selection criteria and that the choice of auditor should be based on quality, including independence, challenge and technical competence, not price or perceived cultural fit.
• Reviewing the effectiveness of the external audit process including assessing audit quality, identified audit risks and audit execution plan inviting challenge by the external auditor, giving consideration to points raised and making changes in response, as well as obtaining feedback on how the audit is conducted from relevant stakeholders in the business.
• Reviewing the independence and objectivity of the external auditor and development of a non-audit services policy.
• Reporting to the board and members of the company on how it has discharged its responsibilities in respect of the external audit.

The FRC expect all audit committees to take note of the release by the FRC of the minimum standard for audit committees.

11. Companies urged to set up AI governance framework

The Chartered Governance Institute UK & Ireland (formerly known as ICSA) has called on boards to develop governance policies and procedures around the use of artificial intelligence, so they can be ready for the risks and opportunities AI brings.

The key recommendations are:

• The governance framework should set out clear roles and responsibilities and be regularly reviewed as the AI landscape evolves.
• AI systems must be transparent and accountable. Internal and external stakeholders need to be able to see how they have been used and factored into company decisions.
• Checks and reviews will be needed to audit and mitigate the risk of bias within AI systems, to ensure fairness and avoid discrimination.
• Data collected and processed by AI should be used in a responsible and ethical manner. Data governance policies and procedures need to be kept up to date to protect the privacy and security of that data.
• Companies will also need access to the high-quality data that is needed to train and deploy AI systems effectively.

12. Corporate Governance Code

The Corporate Governance Code, published by the Financial Reporting Council, applies to premium listed companies on the London Stock Exchange (regardless of where they are incorporated), and operates on a comply and explain basis. Given the importance of corporate governance, many unlisted companies voluntarily choose to implement the Code.

Earlier this year, the FRC launched a public consultation on proposed revisions to the Code. The changes were aimed at enhancing the Code’s effectiveness in promoting good corporate governance, including:

• Setting out a revised framework of prudent and effective controls to provide a stronger basis for reporting on, and evidencing their effectiveness.
• Improving the functioning of comply-or-explain, taking account of recently published FRC research and reports.
• Making necessary revisions to reflect the responsibilities of the board and audit committee for sustainability and ESG reporting, and associated assurance in accordance with a company’s audit and assurance policy.
• Updating the Code to ensure that it aligns with changes to legal and regulatory requirements, including strengthening reporting on malus and clawback arrangements.

The consultation closed on 13 September 2023. It is expected that the changes will apply to financial years beginning on or after 1 January 2025 and ESG is expected to be an area of focus in the forthcoming changes.