In this month’s ESG Market Alert, we cover:

• The FCA’s final rules on mandatory D&I reporting for UK listed companies;
• ESMA publishes additional guidance on the publication of ESG alternative performance measures in regulated information/prospectuses;
• The European Commission adopts the delegated regulation for the Sustainable Finance Disclosures Regulation; and
• What’s new in market practice: ESG criteria in the context of executive remuneration.

Final FCA rules on mandatory D&I reporting for UK listed companies

The FCA has published amendments to the UK Listing Rules and Disclosure Guidance and Transparency Rules which implement mandatory “comply or explain” board and executive management-level diversity and inclusion reporting for UK-listed companies.

The new rules apply to:

1. all companies with equity securities listed on the LSE, (whether UK or non-UK incorporated and including companies with equity GDRs), except for open-ended investment companies and shell companies (such as SPACs); and
2. premium listed closed-ended investment companies, but not to closed-ended investment companies admitted to the Specialist Fund Segment.

The rules do not apply to companies admitted to trading on AIM or which only have listed debt or other non-equity securities.

The new reporting requirements require in-scope companies to report annually whether they have met specific board diversity targets at a chosen date within their reporting period and, if not, to explain why they have failed to meet those targets. The board diversity targets are:

• at least 40% of the board are women;
• at least one of the senior board positions (Chair, Chief Executive Officer (CEO), Senior Independent Director (SID) or Chief Financial Officer (CFO) is a woman; and
• at least one member of the board is from a minority ethnic background (which is defined by reference to categories recommended by the Office for National Statistics ("ONS") excluding those listed, by the ONS, as coming from a White ethnic background).

The rules are effective immediately and apply in respect of accounting periods starting on or after 1 April 2022. However, the FCA is also encouraging companies whose current financial year began on or following 1 January 2022 to consider complying with the new rules on a voluntary basis.

Read the full article on the FCA rules on mandatory D&I reporting here.

ESMA publishes guidance on the publication of ESG measures in regulated information or prospectuses

On 1 April 2022 ESMA published updated Q&As on its guidelines on alternative performance measures (“APMs”) (the “Guidelines”).

In these responses, ESMA concluded that where financial measures relating to ESG matters (for example green turnover or sustainable CAPEX) are published in regulated information or prospectuses, such measures fall within the scope of the Guidelines. This means that those ESG measures must comply with the principles set out in the Guidelines in relation to (amongst others) definitions, labels, reconciliations to audited figures and explanations. These requirements do not apply where the measures are determined in accordance with applicable legislation (such as the Taxonomy Regulation or the EU Sustainable Finance Disclosures Regulation) in accordance with paragraph 4 of the Guidelines.

ESMA also advised issuers to exercise caution when presenting APMs using ESG labels, as these may be misperceived by users as being compliant with the Taxonomy Regulation or SFDR. Issuers must therefore make clear whether a specific ESG financial measure is determined in accordance with one of these regimes, either by displaying this in the label or in any accompanying information (e.g. via a footnote).

The formalisation of the treatment of ESG-related KPIs by ESMA is an important development. It is intended to mitigate "greenwashing" and improve the reliability, transparency and comparability of issuers' ESG measures.

There is also increased regulatory focus on the need to make real-time disclosures where ESG-related KPIs which have been prominently featured by an issuer diverge from expectations. We expect this to be an area of great focus in the next year of reporting.

The European Commission adopted the delegated regulation for the Sustainable Finance Disclosures Regulation (“SFDR”)

On 6 April 2022 the European Commission adopted the Delegated Regulation containing regulatory technical standards to be used by financial market participants when disclosing sustainability-related information on investment products under the SFDR, which will apply from 1 January 2023.

To ensure comparability among different financial market participants, the regulatory technical standards require:

1. a mandatory reporting template to describe how principal adverse impacts on sustainability factors are taken into consideration in investment decisions;
2. a summary section and information on policies on the identification of principal adverse impacts; and
3. actions planned and taken to mitigate the principal adverse impacts (e.g. reduction of carbon emissions), or adherence to international standards and historical comparisons.

What’s new in market practice: ESG criteria in the context of executive remuneration

The use of ESG performance measures in connection with both short term remuneration (i.e. annual bonuses) and long term incentives continues to grow. We are seeing a growing debate on the appropriate limit to be imposed on the proportion of variable remuneration which should be subject to ESG criteria. Although such a limit has not been specified in the current voting guidelines, more detailed voting guidance can be anticipated in the future as this aspect of executive remuneration develops.