FRC sets out plans to help integrate sustainability into corporate governance, reporting and audit reforms

Whilst we wait for the Government to bring in legislation to strengthen the UK’s corporate governance, reporting and audit systems (see our article here), the Financial Reporting Council (“FRC”) have produced their own position paper on Restoring Trust in Audit and Corporate Governance (the “Position Paper”), covering how and when it plans to help achieve the Government’s ambition.

The Position Paper outlines a number of positions relating to sustainability, including its proposed updates to the Corporate Governance Code, Strategic Report guidance, and non-financial reporting.

The points addressed reflect a continuing shift towards integrating and hardening sustainability-related expectations within the UK regulatory ecosystem. Corporates, in-house lawyers and other stakeholders looking to shape, or at least better understand and prepare for what is coming, will benefit from engaging early with the FRC’s proposals:

• Updating the UK Corporate Governance Code (“the Code”). Amongst other revisions to the Code, changes will be made to reflect the wider responsibilities of the Board and Audit Committee for expanded sustainability and ESG reporting and, where commissioned by the company, appropriate assurance in accordance with a company’s audit and assurance policy. Businesses who are required to follow the Code under the Listing Rules or who do so voluntarily will be required to take steps in due course to integrate these changes for periods commencing on or after 1 January 2024.
  
  
• Updating Strategic Report guidance. Subject to the Government finalising how it intends to implement the International Sustainability Disclosure Standards (“ISSB”) in the UK, the FRC will revise its Strategic Report guidance, so that the Strategic Report remains a source of decision-ready information. Timing will be informed by stakeholder engagement and market needs so is currently TBD.
  
  
• Sustainability reporting. As expected, the FRC has said it strongly supports the efforts of the ISSB to develop a global baseline to support sustainability reporting and will work closely with international regulators and standard setters. Businesses familiar with Taskforce on Climate-related Financial Disclosures (“TCFD”) reporting will be well placed to comply with the ISSB’s framework, although will need to take some additional steps.

It is worth noting that the ISSB and TCFD approaches both focus on the risks and opportunities that businesses face from climate and sustainability, but not the risks and opportunities businesses pose to them. Accordingly, the FRC has not commented on the so-called “double materiality” approach here, or in their recent response to the ISSB’s exposure drafts of their draft disclosure standards. However, since double materiality forms part of the EU’s approach to corporate sustainability reporting and likely the UK’s Sustainability Disclosure Requirements regime, it may be that they will have to say more on this sooner rather than later.

• Reducing reporting burdens. The FRC also propose to work with BEIS to help reduce current non-financial reporting burdens on companies, and are looking at opportunities to simplify and improve reporting requirements without reducing quality, including in financial statements and the front half of the annual report. It is not clear yet what this means in practice, but simplification should generally be welcomed for reducing burdens and increasingly comparability and transparency.
  
  
• Review of new reporting requirements. The FRC intend to include in their review processes any new reporting disclosures the government introduce straight away, and are already piloting inclusion of some non-financial reporting such as corporate governance disclosures and remuneration reporting. They will also continue to publish the outcomes of their Corporate Reporting Reviews (“CRR”) of public and large private companies, including any findings related to non-financial disclosures where appropriate, which can be a source of guidance as to best practice, as well as a reputational risk to be considered.

This comes ahead of the FRC’s metamorphosis into the more powerful Audit, Reporting and Governance Authority (“ARGA”) over the next three years.