New sustainability reporting regulations for 2017
Applicable to year-ends beginning on January 1st this year or after, the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 were made law at the end of December. These regulations amend the Companies Act so that it falls in line with the 2014 EU Non-Financial Reporting Directive.
You can get the full detail here but essentially this expands the breadth (slightly) and depth (significantly) of the 2013 Strategic Report regulations concerning sustainability. On the breadth front, reporters will be asked to report on bribery and corruption matters for the first time. As regards depth, reporters will also be asked to discuss not just policies related to, for example, environmental matters, but also associated principal risks and non-financial KPIs.
A preview of what’s next for reporting
Since Theresa May became Prime Minister, it has been clear that improving corporate behaviour via better corporate governance and more transparency is one of her key priorities. The BEIS (Department for Business, Energy and Industrial Strategy – formerly BIS) Select Committee Corporate Governance Inquiry was set up to look at how this might work in practice, informed by previous work on failings at BHS and Sports Direct.
For reporters, the most relevant output was a letter from the FRC’s Stephen Haddrill which proposed several measures to ensure companies act and report in the spirit of section 172 of the Companies Act (the one which stipulates that Directors have a duty to promote the success of the company over the long term, in the interests of various stakeholders, with regard to impact on the environment and so on). You can read a summary of the key changes the FRC believes should be made in areas under its purview (like the UK Corporate Governance Code) here.
The second phase of diversity reporting
The Hampton-Alexander report was published at the end of last year, and includes several clear suggestions for amendments to the UK Corporate Governance Code, amendments which the FRC has subsequently endorsed. The report’s central recommendation is that the Code be updated to require companies to provide statistics on the gender of members of the executive committee (or nearest equivalent) and the direct reports to members of that committee.
The FRC’s review of corporate governance reporting
Just this week, the FRC issued its annual review of developments in corporate governance and stewardship. It includes some interesting examples of where companies have offered strong explanations of non-compliance with the Code, but notes that these are still few and far between. In this first year of viability statement reporting, it was judged that around 15% of companies offered a ‘comprehensive’ statement. In light of this, the FRC’s Financial Reporting Lab will launch a project this year to look at best-practice in viability and risk.
Digital reporting and the FRC’s research priorities
Two other items also appeared towards the end of the year. First, the European Securities and Markets Authority (ESMA) set out the requirement that companies use inline XBRL to report from January 1st 2020. What this will really mean for reporters remains unclear (particularly given the imminent departure of the UK from the EU), but a wholesale move towards HTML reporting and away from print/PDF seems highly unlikely at this stage. Second, the FRC is consulting on the research areas it should focus on in 2017. The two shortlisted are: assessing how corporate communications as a whole could work better for investors and how reporting might better serve the needs of a broader set of stakeholders.
What does it all mean?
Clearly, we may well be about to enter another period of regulatory upheaval, following a calm spell after the Strategic Report regulations came into effect in 2014. Many of the new proposals, however, appear to be common-sense ways to improve transparency. Given these developments, it seems that UK reports may soon be more relevant to a broader stakeholder base, with more in-depth sustainability, diversity and governance information included as standard.