19 January 2021
The Investment Association (IA) has published its shareholder priorities for UK listed companies in 2021. These are areas that the IA has identified as critical in driving long-term value for companies.
This year, the report focuses on the same priority areas as in 2020: climate change, audit quality, stakeholder engagement and diversity. The IA notes that these issues have remained important throughout 2020 and the COVID-19 pandemic.
The report provides an overview of the progress made against the IA’s expectations on these issues set out in the 2020 report, as well as its updated expectations for 2021. It also sets out the approach that the IA’s corporate governance research service (IVIS) will take to assessing companies with year ends on or after 31 December 2020 on these issues, including its approach to giving amber or red top recommendations in certain cases.
The full 2021 report can be accessed here. Tapestry’s summary of the 2020 report can be accessed here.
The key points from the 2021 report are set out below.
1. Responding to climate change
In its 2020 shareholder priorities report, the IA called on UK listed companies to increase the climate-related disclosures they include in their annual reports, by reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD disclosures cover four pillars: governance of climate-related risks and opportunities, assessment and management of climate-related risk, how the company’s strategy takes into account the impact of climate change, and setting climate change-related metrics and targets.
The IA notes that progress is promising in this area, with the number of FTSE 100 companies reporting against at least some of the TCFD pillars in 2020 more than doubling from the previous year (up to 77 in 2020) and 53% of those companies reporting against all four TCFD pillars.
For 2021, investors expect all listed companies to be reporting against all four TCFD pillars and want those disclosures to be more meaningful. To assist with this, the IA recommends companies use the Sustainability Accounting Standards Board’s (SASB) sector specific guidance to determine what information investors will find useful. Investors also expect companies to clearly identify those responsible for the oversight and management of the company’s response to climate change, as well as communicating their path to achieving net zero emissions by 2050 (at the latest).
To support these disclosures IVIS will, for the first time, amber top any company in a high risk sector that is not disclosing against all four TCFD pillars. High risk sectors are identified in the 2021 report and include financial services, energy companies and the food sector.
IVIS will ask companies appropriate questions to identify whether they are making the above disclosures, including the impact of climate-related risk on their approach to capital management.
IVIS also expects companies to include a statement in their annual report that the directors have considered material climate-related matters when preparing and signing-off the company’s accounts.
2. Audit quality
The IA is disappointed with companies’ progress against the expectations for improved audit quality in the 2020 report. Despite calls from the IA for audit committees to disclose how they ensured that their auditors had delivered a high-quality audit, including by challenging management’s judgements and assumptions, the IA found that 94% of FTSE 100 companies failed to provide evidence of how they assessed the quality of the audit, and only 22% of FTSE 100 companies demonstrated how the audit committee had challenged management’s judgement.
The IA will continue to monitor audit quality disclosures and has noted that if it does not see progress in 2021 it will introduce a colour top approach in 2022.
3. Stakeholder engagement
In 2020, the IA reviewed how companies were responding to the new provisions in the UK Corporate Governance Code, and certain director reporting requirements, that require boards to identify and engage with their material stakeholders.
The IA found that disclosures in this area were generally good, however, the IA identified that improvements could be made by including more detail around how the board responded to the views of its stakeholders and how those views impacted decisions and outcomes.
For 2021, the IA wants meaningful disclosures in relation to how the company has continued to engage with stakeholders through the pandemic and how the board has taken those views into account in making decisions.
Continued improvement in terms of diversity at board level, in senior leadership and throughout the workforce was another important issue for the IA in 2020. Whilst improvements have continued to be made in terms of gender diversity (only one all-male board remains in the FTSE 350), the IA notes that there was little progress in improving ethnic diversity in 2020. 37% of FTSE 100 companies still do not have any directors from an ethnic minority on their boards and the IA sees lack of disclosure in this area as a real barrier to change (only 27% of FTSE 100 companies disclosed the board’s ethnic diversity in 2020).
To support change in this area (maintaining progress towards the gender diversity targets in the Hampton-Alexander Review and the ethnic diversity targets in the Parker Review), the IA will continue to colour top the corporate governance reports of companies falling short of investors' expectations:
- Companies with 30% or less women on boards – red top (FTSE 350), amber top (FTSE SmallCap)
- Companies with 25% or less women in senior management – red top (FTSE 350), amber top (FTSE SmallCap)
- FTSE 350 companies who do not disclose either the ethnic diversity of the board, or the action plan towards meeting the Parker Review targets – amber top
The IA has identified each of these four areas as critical in driving long term value creation for companies. Good governance, including effectively managing the risks in these areas, will help ensure companies can continue to deliver the best results for their stakeholders.
It is interesting to see where progress has been made against the priorities and expectations set out in the 2020 report, which has clearly driven some of the updated expectations for this year. Diversity and climate change clearly continue to be particularly key areas, with the move to colour topping more companies that are not meeting expectations. Companies will need to consider the new disclosure requirements when preparing this year's annual reports.
The IA’s priorities for 2021 align with calls we’re seeing for increased disclosure from other large and institutional investors. For example, in its recently updated guidance, Glass Lewis has requested meaningful disclosures against the ethnic diversity targets in the Parker Review and will consider voting against the nomination chair in future if disclosures are not adequate or if improvements are not sufficient.
They also align with recent changes to the UK Listing Rules, requiring all UK Premium listed companies to make disclosures in line with the TCFD pillars for accounting periods from 1 January 2021 onwards, or else explain why not.
We recently held a webinar covering Q4 2020 updates to remuneration-related guidance from key institutional investors, looking at their approach to performance conditions (in-flight adjustments and for new awards), ESG metrics, 2020 bonuses, 2021 LTIP awards, post-employment shareholding requirements and new disclosure requirements, amongst other matters. If you would like a copy of the recording of the webinar, please let us know.
If you have any questions surrounding the IA’s shareholder expectations, or would like to discuss any of the updated disclosures required in your Directors’ Remuneration Report this year, then please do get in touch.