London, 31st July 2023: The roundtable began with an introduction to the work of the Financial Reporting Council (FRC) and the Corporate Governance Code, which is currently undergoing a consultation.
The FRC emphasised that the Code is principles-based rather than rules-based, reminding attendees that relevance to business operations is the critical test for determining if and how something needs to be reported on.
From a lively discussion, five key themes surfaced: the attractiveness of the UK; the ‘comply or explain’ regime; materiality and interoperability; ESG in the investment process; and proxy advisors.
Below is a summary of the discussion and the FRC’s perspective:
• Attractiveness of the UK – The general view among attendees was that investor accessibility is a greater factor than regulation in the departure of companies from the UK to international markets. The FRC agreed, noting that those companies who leave the UK for the US are entering the more heavy-handed and rules-based Sarbanes-Oxley regime, which the UK government removed from its reform plans for the audit industry.
The regulatory and reporting burdens on public companies are often cited as a reason why companies choose to list their shares elsewhere. The FRC argued that public companies should not have more responsibilities than private companies, but until legislation to establish the Audit, Reporting and Governance Authority (ARGA) is passed, it has no oversight of private companies.
• ‘Comply or explain’ – Some attendees questioned whether the FRC was becoming more prescriptive in its guidance, particularly on ESG reporting. In response, the FRC emphasised that companies only need to report on something if its Board decides that it is relevant and material to the company’s business operations. The FRC sought to encourage companies to think about which stakeholders are most important to the success of the business and what is most relevant to them.
• Materiality and interoperability – A number of attendees highlighted that many companies, particularly multi-national companies, are faced with an ‘alphabet soup’ of non-financial reporting requirements. The lack of interoperability between frameworks means that many companies are having to report against frameworks that may not be material to their business.
The FRC expressed its desire for a globally-aligned framework and supported the recently published ISSB standards. It suggested that one possible solution to the fragmentation problem is for companies to engage with and support the ISSB. The FRC concluded that it is in the power of the global investor community to maintain the momentum of the ISSB and ensure that it is widely adopted.
• ESG in the investment process – There was broad agreement that ESG should not be considered an ‘area’ and that there is no such thing as an ESG fund. Instead, ESG is an input into the investment process rather than the ultimate descriptor of that fund. Attendees contributed anecdotal evidence about the relative de-prioritisation of ESG language in fund names, particularly for institutional investors. The FRC said that this was a particular topic of dialogue when it engaged with signatories of the Stewardship Code.
• ESG ratings agencies and voting agencies – Attendees shared their frustration that voting agencies were not regulated. They also highlighted how voting agencies sometimes make voting recommendations based on inaccurate research. The FRC briefly discussed the research it recently published on proxy advisors, ESG ratings agencies, and their role in the wider ecosystem. The full report is available here.
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