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August 13, 2023

Primary Market Bulletin 45 - IFRS sustainability disclosures, third country auditors and shell companies

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Primary Market Bulletin 45 - IFRS sustainability disclosures, third country auditors and shell companies

On 10 August 2023, the FCA issued another of its regular newsletters to primary market participants, Primary Market Bulletin 45 ("PMB 45"). This covers four topics: new IFRS sustainability and climate-related disclosures, the need for non-UK listed companies to have a FRC-registered third country auditor, forthcoming ending of transitional relief for shell companies and MFA for access the FCA's online systems.

For some companies with "qualifying" businesses or operations in the EU, compliance with the new EU sustainability reporting standards, as well as the IFRS disclosure standards, may also be relevant. We discuss this possible overlap in reporting below.

New IFRS Sustainability and Climate-related Disclosures

In June 2023, the International Sustainability Standards Board ("ISSB") issued IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (“S1”) and  IFRS S2 Climate-related Disclosures (“S2”) (together, the "ISSB Standards"), both with accompanying (illustrative but non-interpretative) guidance. 

IFRS S1 and S2

S1 requires an entity to disclose in its annual financial report information about all sustainability-related risks as well as opportunities that could reasonably be expected to affect the entity’s cash flows and access to finance or cost of capital, over the short, medium or long term (“sustainability disclosures”). It sets out how these disclosures are to be made or presented and general requirements with respect to their content. These requirements include:

  • the governance processes, controls and procedures used to identify, assess, prioritise, monitor, manage and oversee the sustainability disclosures 
  • the strategy for managing the sustainability disclosures
  • how the entity has performed in relation to the sustainability disclosures, including progress towards meeting any targets it has set itself or is required to meet by law or regulation.

S2 has a similar purpose and reporting requirements to S1 but is focused on climate change risks - physical as well as transition - and opportunities. Both S1 and S2 apply to accounting periods starting on or after 1 January 2024. 

Next steps - UK endorsement

In its Greening Finance: A Roadmap to Sustainable Investing paper (see our commentary on it here), the Government confirmed its commitment to building the UK's corporate sustainability disclosure requirements around these ISSB Standards once finalised and endorsed by the UK and re-confirmed this commitment in its March 2023 Mobilising Green Investment: 2023 Green Finance Strategy paper (see section 2.2.3). It announced the setting up of two advisory committees to assist with assessing the ISSB Standards, prior to the UK's formal endorsement of them as accounting reporting standards under UK company law. This work will be carried out alongside the work being carried out more generally as part of the UK's Non-Financial Reporting Review

The FRC is leading the work of the technical advisory committee and last month issued a Call for Evidence seeking views on the requirements of the standards, including whether they will result in useful disclosures that can be prepared on a timely basis without disproportionate cost.   

The Government has said that its aim is to make a decision on endorsement within 12 months of the ISSB Standards being published (and sooner if possible). 

Next steps - FCA consultation

The FCA has previously said it will be consulting on updating the current TCFD "comply or explain" disclosures for premium and standard listed equity issuers so that they align with the ISSB Standards once they are endorsed by the UK Government. It plans to do this in the first half of 2024 with the aim of finalising its position by the end of 2024 so that the ISSB Standards will start to apply to accounting periods starting on or after 1 January 2025. Its consultation will take into account the work of the Government's two advisory committees mentioned above and also its proposed equity listing regime reform (see our commentary on that here). Significantly, it will also be consulting on moving from the existing "comply or explain" disclosure basis to mandatory disclosures. 

Transition plans ("TPs")

The FCA's Listing Rules' existing TCFD disclosures require issuers to take account of TCFD guidance which encourages issuers to describe their plans for transitioning to a low-carbon economy. In addition, issuers headquartered in a jurisdiction which has a net zero economy commitment - such as the UK, by 2050 - are encouraged to assess the extent to which they have considered that commitment in developing their disclosed TP. PMB 45 notes the enhanced TP reporting by listed companies that should result from S2 and the work of the Transition Plan Taskforce. 

S2 will require disclosures in respect of any TP that the reporting entity has. Secondly, recognising the importance of effective TPs in the private sector for achieving a net zero economy, in 2022 the Government commissioned the Transition Plan Taskforce (the "TPT") to consult on and develop a "gold standard" disclosure framework for TPs. Last month, the TPT published an update on its work in which it said that it aims to publish a final Disclosure Framework for TPs in October 2023, to be supported by implementation guidance and a suite of sector-specific guidance (to be consulted on and then finalised in early 2024). 

In addition, the Government confirmed in its Mobilising Green Investment paper (mentioned above) that it would be consulting on the introduction of requirements for the UK's largest companies to disclose any TPs that they have, bringing them into line with TP disclosures made by listed companies. A dual threshold test of having more than 500 employees and a turnover of more than £500 million currently applies to unlisted UK companies that have been required, since April 2022, to include "climate-related financial disclosures" as a part of their non-financial and sustainability information statement in their strategic reports. The Government expects this consultation to take place in Q4, 2023, following the release of the TPT's finalised Disclosure Framework.

In PMB 45, the FCA says it considers the TPT Framework should provide good guidance for the TP disclosures required by S2. 

What should companies do to prepare for ISSB Standards-aligned reporting?

PMB 45 concludes on this topic by listing three actions that companies can take in readiness for the new sustainability reporting: improving the quality of current reporting (in the areas previously identified by the FCA and FRC); consider reporting on a voluntary basis now S1 and S2 have been published and once the final TPT Disclosure Framework and guidance is issued; and engage with the current Call for Evidence mentioned above in relation to the UK's endorsement of the ISSB Standards.

ISSB Standards v European Sustainability Reporting Standards ("ESRS")

ESRS

Under the EU Corporate Sustainability Reporting Directive ((EU) 2022/2464), EU and certain non-EU entities will have to report on sustainability matters in accordance with the EU's own ESRS. As with the ISSB Standards, these standards will apply to financial years starting on or after 1 January 2024 for "large" public interest entities (including non-EU listed companies) with more than 500 employees. Other "large" companies (including non-EU listed companies) will have to report by reference to the ESRS for periods starting on or after 1 January 2025. Listed SMEs (including non-EU listed SMEs) will become subject to ESRS reporting for periods starting on or after 1 January 2026 (or, at the option of the SME, no later than 1 January 2028).

In addition, non-EU corporates with a net turnover in the EU of over €150 million and that have: (i) a branch in the EU with a net turnover exceeding €40 million, or (ii) a subsidiary qualifying as a large company or a listed SME, will have to start reporting on a group basis for their financial years starting on or after 1 January 2028. Modified ESRS will apply to this non-EU corporate reporting.

Overlap between the ISSB Standards and the ESRS

As the European Commission explains in its Q&A in relation to the ESRS, the two sets of standards have been developed in parallel through dialogue between the Commission, the European Financial Reporting Advisory Group and the ISSB, so as to ensure a "very high degree of alignment where the two sets of standards overlap". Thus, reporting under the ESRS on climate change will to a very large extent involve the same reporting that is required under the IFRS Standards and thus avoid companies having to issue two separate ESRS and ISSB reports. 

That said, it must be remembered that the ESRS are broader in scope than the ISSB Standards - they cover a full range of ESG issues (not just climate or sustainability issues) and they operate with what is called a "double materiality" perspective. That means that they require reporting of material information both with respect to the impacts of the reporting company on people and the environment and also (as do the ISSB Standards) on how social and environmental issues create financial risks and opportunities for the company itself. As a result, reporting under both sets of standards will not necessarily be identical and therefore for those UK companies that are also caught by the ESRS, some additional reporting may be required. 

Other UK sustainability and climate-related corporate reporting

The new ISSB Standards will help underpin the existing sustainability and climate-related disclosures required from UK companies in their strategic reports, including consideration of climate and sustainability-related risks that certain "large" companies will have to include in the new Resilience Statement being introduced as part of a package of new statutory corporate reporting requirements, from the start of 2025 for listed companies and a year later for all other "large" UK companies. See our commentary here on those new reporting requirements.

Third country auditors - suspensions of listings

DTR 4.1.7R requires, in the case of UK-traded third country-incorporated companies, the auditing of their annual financial statements to be carried out by an auditor registered by the FRC as a third country auditor (if not by a UK statutory auditor). The FCA have previously written to such companies whose accounts have not be audited in this way, warning them that this failure means that they have breached their obligations to publish "audited" financial statements in compliance with the DTRs and that the FCA may take action as a consequence, including temporarily suspending their listing. 

In PMB 45, the FCA states that going forward, in any such case of non-compliance it intends to suspend the issuer's listing (temporarily) until the relevant accounts have been properly audited. Issuers who may be at risk of breaching DTR 4.1.7R are encouraged to apply to the FCA for a suspension and also to consider whether an announcement may be required under their MAR disclosure obligations.

Transitional relief for the minimum market capitalisation of shell companies coming to an end

PMB 45 also reminds cash shell companies that the transitional relief they were given in relation to their future applications for listing following the cancellation of their "shell" listing and completion of a reverse takeover acquisition, when the minimum market capitalisation requirements for equity listings were increased from £700,000 to £30,000,000 in December 2021, will come to an end on 4 pm 1 December 2023. In order to benefit from being relisted with a market capitalisation of less than £30,000,000, a shell company will need to have made a complete submission for relisting prior to that deadline. Otherwise, the much higher minimum market capitalisation requirement following the reverse takeover and relisting will apply. 

MFA for access to FCA online submissions

Finally, the FCA advises that it has introduced multi-factor authentication for logging in to make submissions via its Electronic Submission System. 

"We've been a strong advocate of the development of international corporate reporting standards on sustainability ... [and] ... expect to consult in the first half of 2024 on proposals to implement disclosure rules referencing UK-endorsed IFRS S1 and IFRS S2 for listed companies .... with a view to bring new requirements into force for accounting periods beginning on or after 1 January 2025." from PMB 45

Autoren und Mitwirkende

Michael Scargill

Counsel

Mergers & Acquisitions

+44 20 7655 5161

+44 20 7655 5161

London

Maegen Morrison

Partner

Mergers & Acquisitions

+44 20 7655 5064

+44 20 7655 5064

London

Paul Strecker

Partner

Mergers & Acquisitions

+44 20 7655 5047

+44 20 7655 5047

London

Nick Withers

Partner

Mergers & Acquisitions

+44 20 7655 5956

+44 20 7655 5956

London

Simon Burrows

Partner

Mergers & Acquisitions

+44 20 7655 5696

+44 20 7655 5696

London

Michael Mountain

Partner

Mergers & Acquisitions

+44 20 7655 5009

+44 20 7655 5009

London

Karla Dudek

Counsel

Mergers & Acquisitions

+44 20 7655 5661

+44 20 7655 5661

London