EY UK Governance and Regulatory Spotlight - May edition

Welcome to the May edition of our Regulatory and Governance Spotlight. It was a pleasure to have nearly 500 of you join our webcast on 23 April “Reporting or re-thinking? Tackling the internal control changes in the 2024 Corporate Governance Code”. If you missed it, it’s not too late to access the recording by registering: 2024 UK Corporate Governance Code (ey.com).

Governance and reporting updates

Fraud

The ‘failure to prevent’ (FTP) fraud offence, part of the Economic Crime and Corporate Transparency Act (ECCTA) 2023, offers companies a defence if they can demonstrate that ‘reasonable procedures’ were in place to prevent fraud. We anticipate that the UK government will imminently publish guidance on the offence (including on what constitutes ‘reasonable procedures’), and the offence will become effective after a short implementation period.

From our conversations with companies, many have already started preparing for this change. Organisations aiming to enhance their fraud prevention, detection and response strategies may find the latest report from the Association of Certified Fraud Examiners (ACFE), 'Occupational Fraud 2024: A Report to the Nations', insightful. It reveals that the average loss from fraud cases stands at over USD1.6 million, with tips and whistleblowing accounting for the detection of 43% of these cases. This report follows on from the benchmarking report by the ACFE and SAS Institute that explored the impact of data analytics on fraud prevention, discussed in our March edition of Spotlight.

Sustainability oversight

Companies which have or are contemplating establishing dedicated board-level sustainability committees to manage sustainability-related initiatives and ensure regulatory compliance, may find this thought leadership paper published by the Chartered Governance Institute UK & Ireland helpful. Whilst recognising that such dedicated committees may not be the right approach for all companies, it offers practical advice for their effective functioning.

Green Spotlight

Environmental reporting - further cooperation and global alignment

Over the past two years, the Taskforce on Nature-related Financial Disclosures (TNFD) and the Global Reporting Initiative (GRI) have been supporting the development of each other’s respective recommendations, standards and guidance. Further cooperation was announced in April 2024, with forthcoming publications of a TNFD-GRI interoperability mapping document and joint illustrative case studies and guidelines on the links between nature related dependencies, impacts, risks and opportunities.

In April 2024, the International Sustainability Standards Board (ISSB) announced that it would be exploring the feasibility and necessity of initiating standard-setting work in respect of biodiversity and human capital. In a similar vein to the above, cognisant of the need for global alignment, the ISSB will be leveraging existing initiatives, such as the TNFD.

UK Government’s progress on commitments made in the 2023 Green Finance Strategy

Whilst the UK Government had stated in its 2023 Green Finance Strategy (the Strategy) that it would explore how to incorporate TNFD into UK policy architecture, it is now more likely that the above research project by the ISSB will influence direction of travel on nature-related reporting in the UK.

On 16 May, the Government published a status update on other reporting commitments in the Strategy and a framework document which summarises the overall endorsement and implementation framework that is being established within the UK. Notably:

►    It aims to make the UK-endorsed ISSB standards IFRS S1 and S2 (“UK Sustainability Reporting Standards or UK SRS”) available in Q1 2025. To achieve this, the UK Sustainability Disclosure Technical Advisory Committee, whose chair was also appointed on 16 May, will commence the assessment process in Q2 2024 and make a recommendation to the Business and Trade Secretary in Q4 2024.

►    Previously expected by the end of 2023, a consultation on the disclosure of transition plans (TPs) by UK’s largest companies will be published by Government in Q2 2024.

►    Subject to a positive endorsement decision by the Business and Trade Secretary on the UK SRS, the FCA will, following consultation, be able to use them to introduce requirements for UK-listed companies to report sustainability-related information. The FCA also plans, through this consultation, to consult on strengthening its expectations for transition plan disclosures with reference to the UK Transition Plan Taskforce (TPT) Disclosure Framework.

Any changes that may be introduced by the Government would be effective no earlier than accounting periods beginning on or after 1 January 2026. No timelines have been provided for the FCA’s proposals. 

Aside delayed timelines, it would not be surprising if the new disclosure requirements are brought in on a voluntary rather than mandatory basis, given the Government’s active focus on minimising regulatory burden to enhance the attractiveness and competitiveness of the UK.

UK groups considering adopting IFRS S1 and S2 ahead of time should note that:

► The ISSB has published the IFRS Sustainability Disclosure Taxonomy (ISSB Taxonomy), which incorporates the IFRS S1 and S2 standards and their guidance and has been developed to integrate with the IFRS Accounting Taxonomy.

► The IFRS Foundation and the European Financial Reporting Advisory Group (EFRAG) have published interoperability guidance for climate-related sustainability disclosures under European Sustainability Reporting Standards (ESRSs) and S2, setting out what companies will need to do to comply with both standards.

Transition plans

Even though the disclosure of TPs remains voluntary for now, and consultations from the Government and FCA are yet to come, many companies have already prepared or are actively developing their TPs and therefore may find the latest resources from the TPT insightful. These include:

► Deep dive sector-specific transition plan guidance for seven sectors which were selected given their emissions intensity or their importance in the context of the need for or the provision of transition finance. The seven sectors are: asset owners, asset managers, banks, electric utilities & power generators, food & beverage, metals & mining and oil & gas.

► Summary guidance for 30 sectors of the global economy - includes recognised decarbonisation levers, metrics & targets, and key sources of guidance for a TP in each of the 30 sectors. This guidance is based on existing third-party guidance and is designed to support a high-level interpretation of the three principles of the TPT Disclosure Framework i.e., ambition, action, and accountability.

► A transition planning cycle guide - sitting alongside the TPT Disclosure Framework, this guide aims to provide helpful steers for entities which are either developing their first TP or reviewing and updating previous TPs.

► A guidance document on the opportunities and challenges relating to the use of private sector transition plans in emerging markets and developing economies.

► Advisory papers (independent of the core suite of TPT documents) from the TPT’s Working Groups on Adaptation, Nature, Just Transition and SMEs which explore how transition planning can extend beyond realising net zero.

Greenwashing

Our December 2023 Spotlight covered the Financial Conduct Authority’s (FCA) anti-greenwashing rule – one part of the package of measures under the new Sustainability Disclosure Requirements (SDR). This rule was introduced to ensure that sustainability-related claims about a firm’s products and services are fair, clear and not misleading.

In response to firms calling for it to further clarify its expectations and provide examples, the FCA has released finalised guidance. While it is consistent with existing expectations and does not create new obligations, it should help in scope authorised firms comply with the rule. This guidance also provides food for thought given that the FTP fraud offence (referenced above), will likely capture greenwashing within the definition of fraud, as explained in this EY article.

Despite calls for a 6-month delay, the guidance comes into force alongside the rule on 31 May 2024. Ahead of this, authorised firms will need to evaluate their communications to ensure they align with the new requirements, and that procedures and controls are adequate to ensure sustainability claims are substantiated and documented correctly.

Diversity and inclusion (D&I)

The Inclusion at Work Panel, established by Business and Trade Secretary Kemi Badenoch MP, has released a report on enhancing D&I in UK businesses. The Panel's findings, drawn from academic research and surveys, suggest a disconnect between the significant resources invested in D&I initiatives and their actual impact. Badenoch emphasised the need for equality, diversity, and inclusion efforts that support meritocracy and comply with equality laws. The report sets out how employers can avoid ineffective D&I practices and invest in evidence-backed initiatives that ensure value for money and genuine inclusivity. This is aligned with the changes introduced by the 2024 UK Corporate Governance Code, which now requires that nomination committees look beyond policies to any initiatives on D&I linking these to strategy and setting out how they have been implemented.

The UK government, in partnership with Disability Confident and the Chartered Institute of Personnel and Development (CIPD), has also released updated guidance for managers on employing people with disabilities. This follows a CIPD report revealing that managerial knowledge and confidence are key obstacles in supporting disabled employees. The guidance covers legal responsibilities, inclusive practices, and support for specific conditions, aiming to improve workplace inclusivity and employee retention. It complements the UK government's broader efforts, including the £2.5 billion Back to Work Plan, to enable one million more disabled individuals to enter the workforce.

Other regulatory updates

Effective from 2 May, Companies House has the authority to levy civil financial penalties (as an alternative to pursuing criminal prosecution through the courts) of up to £10,000 for a range of offences under the Companies Act 2006 as a result of the ECCTA 2023.

Events

Register to join us for an in-person event on Tuesday 21 May 2024 at our London Bridge office. We will be joined by Maureen Beresford, Financial Reporting Council and Michelle Lewis, Companies House, to discuss the 2024 UK Corporate Governance Code and the ECCTA 2023. 

Please get in touch for help with governance or narrative reporting matters. If your colleagues would like to subscribe to this e-bulletin, please share this form. Best wishes,

Mala and Maria

EY Regulatory and Public Policy team

Contacts

Mala Shah-Coulon Associate Partner

Ernst and Young LLP +44 (0)20 7951 0355

mshahcoulon@uk.ey.com

Maria Kepa Director Ernst and Young LLP

+44 (0)20 7951 8164

mkepa@uk.ey.com