Implementation of the EU Non-financial Reporting Directive

The government has published a draft of the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 (Regulations) which implement the EU Non-financial Reporting Directive (2014/95/EU) (Directive). To access the government's consultation and response statement – click here. The Regulations have now been laid before Parliament with the intention that they apply to financial years beginning on or after 1 January 2017.

The Regulations require relevant companies (see below) to prepare a non-financial information statement as part of their strategic report. If a company's strategic report is a group strategic report, the non-financial information statement must be a consolidated statement relating to the undertakings included in the consolidation.

The statement must contain information to the extent necessary for an understanding of the company’s development, performance and position and the impact of its activity, relating to, as a minimum:

  • environmental matters (including the impact of the company's business on the environment);
  • employee and social matters;
  • respect for human rights; and
  • anti-corruption and bribery matters.

The statement must include a description of:

  • the company's business model;
  • the policies pursued by the company in relation to the issues to be reported upon and the due diligence processes implemented by the company in pursuance of them;
  • the outcome of those policies;
  • the principal risks relating to the matters to be reported on including how the company manages those risks. The narrative should include, where relevant and proportionate, a description of those business relationships, products and services which are likely to cause adverse impacts in those areas of risk; and
  • the non-financial key performance indicators relevant to the company's business.

If the company does not pursue policies in relation to one or more of the non-financial matters, it must provide a clear and reasoned explanation for not doing so. Disclosure of information about impending developments or matters in the course of negotiation may be withheld, if the disclosure would, in the opinion of the directors, be seriously prejudicial to the commercial interests of the company, provided that such non-disclosure does not prevent a fair and balanced understanding of the company's development, performance or position or the impact of the company's activity.

The Regulations apply to:

  • traded companies (i.e. those with securities admitted to trading on regulated markets such as the main market of the London Stock Exchange);
  • banking companies;
  • authorised insurance companies; and
  • those companies carrying out insurance market activities.

Companies which benefit from a "small" or "medium sized" company exemption need not comply. Companies or groups with, on average, less than 500 employees during the relevant reporting period are also exempt.

The effect of the Regulations is to amend the Companies Act 2006 (Companies Act). However, while the new requirements sit alongside the provisions requiring the production of a strategic report, they have been kept deliberately separate from them. The government has also attempted to address the significant areas of overlap between the two sets of requirements and has requested that the Financial Reporting Council (FRC) provide guidance on the revised strategic reporting regime in due course.

FCA implements diversity policy element of EU Non-financial Reporting Directive

The Financial Conduct Authority (FCA) has published amendments to the Disclosure Guidance and Transparency Rules (DTR) following consultation.

The key change is the introduction of new rule DTR 7.2.8A, to implement a further aspect of the Directive which requires certain issuers to disclose their diversity policy in the corporate governance statement of their Annual Report to the extent that such a policy is in place. If no diversity policy is applied, the corporate governance statement must contain an explanation of why this is the case.

There is a clear overlap between these requirements and provision B.2.4 of the UK Corporate Governance Code which recommends that the report of a company's nomination committee in its Annual Report contain a detailed description of the board's diversity policy. Issuers will also recall that the Pensions and Lifetime Savings Association has stated that investors may consider voting against the resolution to approve an Annual Report at an AGM if the company's diversity statement is not considered satisfactory. Moreover, if there is no clear evidence that diversity is being sufficiently considered by the board, then a vote against the chairman of the board may be warranted.

The new rule applies to relevant issuers with financial years beginning on or after 1 January 2017.

Boardroom diversity

The Parker Review (Review), led by Sir John Parker, has concluded that the boardrooms of Britain's leading public companies do not reflect the ethnic diversity of either the UK or the stakeholders that they seek to engage and represent. The Review highlights that ethnic minority representation in FTSE 100 boardrooms is disproportionately low, especially when looking at the number of UK citizen directors of colour.

The Review highlights the key business reasons for increasing ethnic diversity, including from an internal and an external perspective. It also sets out various recommendations aimed at:

  • increasing ethnic diversity on UK boards and sets out an aspirational target for FTSE 100 boards to have at least one director of colour by 2021, with the same target set for FTSE 250 companies by 2025;
  • developing the pipeline of candidates and planning for succession; and
  • enhancing transparency and disclosure.

The Hampton-Alexander Review has also been published. The Hampton-Alexander Review builds on the work of Lord Davies and seeks to apply a similar framework to improving the number of women in leadership roles below the board. It has determined a set of five recommendations including:

  • Women on boards
    • FTSE 350 companies should aim for a minimum of 33% women's representation on their Boards by 2020;
    • FTSE 350 companies should work towards increasing the number of women appointed to the role of Chair, Senior Independent Director and Executive Director;
  • FTSE Women Leaders
    • CEO's of FTSE 350 companies should take action to improve the under-representation of women on the Executive Committee and the layer immediately below;
    • FTSE 100 companies should aim for a minimum of 33% women's representation across their Executive Committee and in the direct reports to that committee by 2020. The Nominations Committee should take an active role in this;
    • FTSE 350 companies should voluntarily publish details of the number of women in this strata of their organisation in the corporate governance section of their Annual Report and lodge this information with the Hampton-Alexander Review;
  • Reporting requirements
    • The FRC should amend the UK Corporate Governance Code to recommend that FTSE 350 companies disclose the gender balance of their Executive Committees and its direct reports;
    • The government should amend the strategic reporting requirements of the Companies Act as regards the disclosure of women in senior management positions to enable progress on gender diversity in different companies to be more easily compared. Potential approaches to this issue have already been consulted on as part of the implementation of the EU Non-financial Reporting Directive;
  • Investors
    • Institutional investors should have a clear process in place for evaluating disclosures and progress on gender balance in FTSE 350 investee companies;
    • A clear voting policy on gender balance should also be developed and articulated;
  • Executive Search Firms
    • Search firms should "apply the same effort and skills in supporting clients to increase the number of women on FTSE 350 Executive Committees and in senior leadership positions"; and
    • Consideration should be given to extending their existing voluntary codes of conduct accordingly.

The government and FRC have both backed the findings of the review.

BEIS consults on implementing the Fourth Money Laundering Directive

The Department for Business, Energy and Industrial Strategy (BEIS) has published a discussion paper outlining possible approaches to the transposition of the Fourth Money Laundering Directive (2015/849/EU) (FMLD) and, in particular, the requirement for EU member states to maintain a central register of beneficial ownership information of corporate and other legal entities.

The UK's current PSC regime is already consistent with many of the FMLD's requirements, but some amendments will be required. For example, BEIS is proposing to extend the current PSC regime to all entities that are incorporated in the UK and are constitutionally capable of having a beneficial owner. This would capture, amongst others: Scottish partnerships and limited partnerships, unregistered companies, building societies, friendly societies and open ended investment companies.

The FMLD also requires BEIS to consider bringing AIM and ISDX quoted companies within the PSC regime as, while the FMLD contains an exemption for companies listed on regulated markets, it does not expressly exempt those on prescribed markets, notwithstanding that they are subject to parallel disclosure obligations under DTR 5. It is also proposed that the publicly available version of a PSC register at Companies House would need to be updated within six months of any change as opposed to annually as part of the current "check and confirm" procedure.

The deadline for responses is 16 December 2016.