ESG tops the list of regulatory initiatives for IR in 2023 but IROs need to stay up to date on changes to proxy reporting, board diversity and executive committees, as Alexandra Cain explains
The IR community is again grappling with an array of changes to the laws and regulations that govern its work. Much of the focus is on new rules in many jurisdictions that outline how companies should be disclosing ESG data. The onus is on helping companies to publish verifiable information investors can use to compare information issued by listed entities operating in the same sector.
In terms of how new climate change disclosure regulations are panning out, it’s worth splitting what’s happening into three groups. The International Sustainability Standards Board (ISSB), an offshoot of the International Accounting Standards Board (IASB), released its Exposure Draft IFRS S2 Climate-related Disclosures for comments in March 2022.
Submissions were due at the end of July 2022 and there’s an expectation that final standards will be issued in early 2023. When these standards are enacted, they will have global application and be based on enterprise value, rather than fair value.
The ISSB will publish sustainability reporting standards that set a baseline level of disclosure to meet the market’s needs. Individual countries’ accounting standards boards and other regulators can then tweak the standards to suit their own jurisdiction's requirements, similar to how the IASB manages IFRS.
At a regional level, the EU is releasing its own standards as part of the Corporate Sustainability Reporting Directive (CSRD). At a national level, the SEC is also issuing its own climate change disclosure rules.
The SEC released proposed new rules in March that outline how listed firms should release information about their material climate change risks and impacts. The regulator has also published draft rules about how emitters should release information about their upstream and downstream climate change effects, as well as the rationale for any climate-related targets.
Why TCFD is the cornerstoneThe good news is that all three regimes – those of the ISSB, the CSRD and the SEC – take into account elements of the TCFD’s reporting framework. This already has the backing of 2,600 organizations worldwide, which should help support some commonality between the different reporting frameworks. It’s still probably a step too far to expect the process of agreeing and implementing climate change disclosure standards to run smoothly, but there is general agreement that rules should be harmonized globally where possible.
‘We believe any global baseline for sustainability reporting requirements should apply as broadly as possible and that regulators should seek to create as much harmonization and convergence with existing and emerging standards and frameworks in reporting as possible,’ says Laura Hayter, CEO of the IR Society in the UK, which supports the ISSB’s decision to base its draft standards on those developed by the TCFD and SASB.
‘We believe the ISSB is traveling in the right direction. But we would like to acknowledge the very significant workload implications for reporting entities in terms of compliance, including time, effort, systems and co-ordination, that will be required across all areas and aspects of their operations, given that sustainability-related risks and opportunities extend across businesses.
‘This burden is likely to be especially felt by reporting entities that are at the start of their sustainability reporting journey and that may also currently lack the required skills and expertise to complete compliance reports.’
We want transition plan disclosure requirements to be high level and principles-based
Transition planThe UK government announced in November 2021 that the obligation to produce and publish a transition plan would apply from 2023 onward. The Transition Plan Taskforce’s (TPT) initial consultation on the sector-neutral framework is expected toward the end of 2022, following its call for evidence earlier this year, with a view to finalizing the framework in early 2023.
‘Responding to the UK TPT’s call for evidence, we support the sector-neutral based approach,’ says Hayter. ‘We want transition plan disclosure requirements to be high level and principles-based, underpinned by more detailed non-mandatory guidance, including practical examples. We also call for flexibility around the location of transition plan disclosures, provided the core information is still required to be included within the annual report and accounts.
‘We feel transition plan requirements should recognize that reporting entities may not to be able to obtain data relating to energy usage and emissions from entities in the value chain that are beyond the reporting entity’s control.’
Canadian concerns Across the Atlantic, CIRI has been actively contributing to the development of a body of thought on ESG and sustainability reporting, commenting on both the SEC climate-related proposal and the ISSB’s Exposure Draft.
‘We generally support mandating ESG and sustainability disclosures but we would like to see global alignment on the reporting standards, which we expressed to both the SEC and the ISSB,’ says Yvette Lokker, CIRI’s CEO. ‘We also raised two concerns with the ISSB proposal around the use of the word ‘significant’ and the timing of the implementation program.’
Lokker says the current draft is confusing when it uses the term ‘significant’ to describe sustainability-related risks and opportunities: ‘It is unclear how ‘significant’ would be defined or measured. CIRI suggests the word be replaced by the word ‘material’, which is a clearly defined and understood concept as it relates to issuer disclosure.’
CIRI’s second concern is the timing of reporting. ‘It takes issuers a considerable amount of time to collect, analyze, address inconsistencies in and report on sustainability-related information, especially greenhouse gas emissions,’ explains Lokker. ‘It would be difficult for them to report all sustainability-related financial disclosures for the same period and at the same time as the related financial statements.’
She says a potential solution is for issuers to be given up to six months to prepare and publish sustainability-related financial disclosures. ‘In time, as processes become more efficient, we expect the timing gap would narrow or be eliminated,’ Lokker adds.
In Canada, issuers report on ESG and sustainability information between three and six months after financial reporting so it will take some time for them to implement processes to close this time gap.
Global standardsAt a national level, a taskforce created by the Canadian government to modernize the Ontario Securities Act recommended that TCFD disclosures be mandated.
CIRI is supportive of this proposal, though recently the Canadian Securities Administrators (CSA) announced that it is going to review the ISSB Exposure Draft and the SEC climate-related proposal, along with all the comments received on these two initiatives, before it proceeds with the taskforce’s recommendations.
‘CIRI welcomes this approach because, ultimately, a global standard will be beneficial to issuers and investors alike, allowing for consistency and comparability,’ says Lokker.
Ian Matheson, chief executive of the Australasian Investor Relations Association, acknowledges that ESG reporting is the big regulatory issue around the world. ‘The first ISSB standards are on climate and they’re designed for investors, not for other stakeholders, which is important,’ he points out.
Matheson says in Australia in this year’s August reporting season, the vast majority of firms incorporated material about their ESG-related risks into their main financial announcement. ‘From a reporting point of view, ESG is on everyone’s lips at the moment,’ he says.
There is always pressure to disclose more on the ESG front so the Australian Securities Exchange’s (ASX) corporate governance council may move to a fifth edition of its guidelines, which may include more prescriptive advice about ESG disclosure.
Proxy reports remain in focus ESG aside, there is also considerable work going into modernizing a raft of different rules to enhance disclosure. For instance, in the US, there are proposed changes to the SEC’s rules on processes for publishing and reviewing proxy advice reports.
In November 2021, the SEC announced a proposal to change the 2020 Final Rule on Proxy Voting Advice, which has yet to be implemented. NIRI has called on the SEC to implement a better draft-and-review process for any further amendment to these rules.
As they stand, the SEC’s proposed amendments would limit listed companies’ ability to comment on proxy advisers’ reports. The changes would also have an impact on proxy companies’ responsibilities with regards to making material misstatements in their publications.
NIRI also continues to lobby the SEC around its support of Rule 10B-1. This rule obliges investment firms to disclose positions in a stock that are built up through equity-based swaps when their value reaches the lesser of $300 mn or the equivalent of 5 percent of issued equity. NIRI supports this rule because it increases transparency over the market.
The US IR association is also calling on the SEC to amend Rule 13D, so organizations that have built up a meaningful position in a stock through an equity swap in order to have their holding meet the disclosure threshold must do so in five rather than 10 days.
In terms of other regulatory initiatives in the works, the CSA is looking at streamlining continuous disclosure requirements. ‘We made a submission on September 17, 2021 and we’re waiting for the outcome of that consultation as it will have a meaningful impact on Canadian issuer reporting requirements,’ Lokker says.
The first ISSB standards are on climate and they’re designed for investors, not for other stakeholders
Governance on boardIn the UK, proposed amendments to the rules regarding diversity on corporate boards and executive committees are imminent. Amendments to the Disclosure and Transparency Rules and Listing Rules on diversity reporting on gender and ethnicity for financial accounting periods began on April 1, 2022.
‘Overall, the IR Society supports the thrust of the recommendations and proposals made by the Financial Conduct Authority,’ says Hayter. ‘We favor initiatives intended to establish better and more comparable information on the composition of companies’ boards and executive management because we agree this should lead to improved shareholder understanding and engagement, as well as provide valuable input to investment decisions.’
She says enhanced transparency is conducive to promoting greater diversity on corporate boards through informing both companies and investors across the whole market.
‘In turn, given that effective corporate governance includes having the right mix of people with relevant skills and experience at board and executive management level making decisions that affect the long-term value and resilience of companies, the IR Society supports moves that encourage greater diversity and inclusion in their composition,' Hayter points out.
‘Clearly, greater diversity is also an important aspiration in its own right.’
We generally support mandating ESG and sustainability disclosures but we would like to see global alignment on the reporting standards
In Australia, some investors are proposing changes to the Tax Act to prevent companies paying out dividends from the proceeds of capital-raisings. The ASX is also in the process of replacing its settlements system, known as CHESS, with blockchain-based technology.
Overall, however, ESG reporting and engagement are the two big issues for IR. Practice continues to evolve on those fronts. Responsibility for ESG increasingly falls to IR and, for some companies, that requires a huge effort. Regulations must acknowledge this.
