Issuers of certain transferable securities listed in the UK should be aware of certain new regulatory requirements relating to the preparation and content of their financial statements.

In this OnPoint, Dechert’s International Capital Markets Team summarises the requirement for:

(i) annual financial reports to be prepared in a new structured electronic format for financial years beginning on or after 1 January 2021; and

(ii) certain climate-related disclosures to be included in financial statements for financial years beginning on or after 1 January 2022.

(i) Structured Electronic Format for Company Annual Financial Reports

What are the changes?

Issuers of transferable securities admitted to trading on a UK regulated market (such as the London Stock Exchange’s main market) that are required to prepare and publish annual financial reports under Disclosure and Transparency Rule (“DTR”) 4.1 must:

(i) produce their annual financial reports for financial years beginning on or after 1 January 2021 (for publication from 1 January 2022) in XHTML format (rather than the current .pdf format); and

(ii) where in-scope issuers prepare annual consolidated accounts in accordance with International Financial Reporting Requirements (“IFRS”), whether UK, EU or international IFRS, mark up those financial statements with tags selected from one of taxonomies designated as permitted taxonomies by the FCA.

In-scope issuers are also required to file their annual financial reports with the FCA for publication on its National Storage Mechanism (DTR 6.2.2R). The FCA has published a step-by-step guide on to how to file annual reports in the new structured report format, which can be found here.

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Why have these new requirements been introduced?

These requirements have been introduced as part of the UK’s implementation of an EU initiative known as “ESEF” (European Single Electronic Format), which has been retained as part of UK law following Brexit (by virtue of the European Union Withdrawal Act 2018), which aims to “improve the accessibility, analysis and comparability of the information”.

While implementation of these new requirements has been expected for some time, implementation has been delayed due to the COVID-19 pandemic. In November 2021, the FCA and the Financial Reporting Council (the “FRC”) published a joint letter to the chief executive officers of issuers whose securities are admitted to trading on a UK regulated market, reminding such issuers of the requirements that apply for financial years beginning on or after 1 January 2021.

The letter also notes that the quality of XHTML voluntary reporting received to date has not been of the expected standard and urges issuers to pay due care and attention to XHTML reporting.

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When do the new rules come into effect?

It is now mandatory for in-scope issuers to file annual financial reports for years commencing on or after 1 January 2021 in XHTML format and to include detailed tagging of the primary financial statements and specified mandatory tags (but there is no requirement for block tagging to be completed on the notes to the financial statements).

In 2023, it will be mandatory for in-scope issuers to publish final annual financial reports for years commencing on or after 1 January 2022 in XHTML format and for such reports to include detailed tagging of primary financials statements, specified mandatory tags AND block tagging of the notes to the financial statements.

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Who does this affect?

This change affects issuers that are required to prepare and publish annual financial reports under DTR 4.1 (such as, generally, issuers of equity securities, depositary receipts and debt securities with minimum denominations per unit of less than €100,000).

Certain issuers of securities are exempt from these requirements pursuant to DTR 4.4. Such issuers include:

(i) public sector issuers (see DTR 4.4.1); and

(ii) issuers that exclusively issue debt securities admitted to trading, the denomination per unit of which is at least €100,000 (or an equivalent amount) (see DTR 4.4.2).

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What should in-scope Issuers do?

The new requirements only affect the format of the annual financial report, with all other obligations relating to the annual financial report remaining unaffected.

This being said, the new XHTML formatting requirements affect the whole annual financial report. Accordingly, the process will require attention from the company secretary, investor relations department and relevant business personnel, as well as the finance team.

To the extent issuers have not already been preparing for this formatting change, they should designate appropriate personnel to lead the project and determine whether or not an external investor relations or other consultant is required to be hired to facilitate production of the new format of annual financial report.

In October 2021, the FRC’s Lab published a detailed report on applying DTR 4.1.14 and the ESEF, which issuers may find useful when applying the new requirements. The report can be found here.

While issuers may continue to prepare a pdf version of their annual financial report in addition to the XHTML version, only the XHTML version will be sufficient to meet the requirements of the DTRs.

(ii) Extension of Climate-Related Disclosure Requirements to Certain Standard Listed Issuers

What’s the change?

In December 2021, the FCA issued its policy statement, PS21/23, on “Enhancing climate-related disclosures”. This policy statement extended the existing requirements for certain climate-related financial disclosures to be made in financial statements prepared by premium listed companies to a wider range of issuers, namely issuers of standard listed shares and global depositary receipts (“GDRs”) representing equity shares (excluding standard-listed investment entities and shell companies). This change has been implemented through the drafting of a new listing rule, LR 14.2.27, relating to information to be included in annual reports and accounts, as well as certain corresponding guidance.

LR 14.2.27 requires in-scope issuers to include a statement in their annual financial reports, on a “comply or explain” basis as to:

• Whether they have made disclosures consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (“TCFD”) and recommended disclosures in their annual financial report;
• Where they have not made disclosures consistent with some, or all, of the TCFD’s recommendations and/or recommended disclosures, an explanation of why, and a description of any steps they are taking or plan to take to be able to make consistent disclosures in the future, and the timeframe within which they expect to be able to make those disclosures;
• Where they have included some, or all, of their disclosures against the TCFD’s recommendations and/or recommended disclosures in a document other than their annual financial report, an explanation of why; and
• Where in their annual financial report (or other relevant document) the various disclosures can be found.

The FCA has also updated its guidance, set out in LR 14.3.2.28G and LR 14.3.31G, with the aim of providing support to in-scope issuers in making these disclosures. This guidance is aligned with guidance provided in listing rule 9 for premium-listed companies (as amended, as described below).

An additional guidance provision has also been included relating to the TCFD’s guidance on transition plans, which notes that, where making disclosures on transition plans as part of its strategy disclosures under the TCFD’s recommendations, a listed company headquartered or operating in a country that has made a commitment to a net zero economy (such as the United Kingdom) is encouraged to assess the extent to which it has considered that commitment in developing and disclosing its transition plan or to explain why it has not done so.

Premium-listed issuers should also note this new and amended guidance (which also applies to premium-listed issuers) and note that the requirements for premium-listed issuers have, in addition to the provisions of the new listing rule, also been updated to refer to TCFD’s new guidance on metrics, targets and transition plans and updated implementation annex following their publication in October 2021.

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Why has this new requirement been introduced?

In its policy statement, the FCA notes that the introduction of this new requirement forms part of the FCA’s “broader strategic aim to promote transparency on climate change and wider sustainability matters along the value chain.” The FCA has also noted that its work supports the UK Government’s commitment to implement the TCFD’s recommendations and the government’s stated aim for sustainability disclosures and has had regard to the UK Government’s commitment to achieve a net-zero economy by 2050.

Among other aims, the FCA expects that this new rule will help lead to better-informed asset pricing and, in turn, more accurate valuations of issuer’s securities.

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When does the new listing rule come into effect?

The new listing rule applies to accounting periods beginning on, or after, 1 January 2022 and, accordingly, the first annual reports that will be subject to the new requirement will be published in early 2023.

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Who does this affect?

The new listing rule, when effective, will apply to all issuers of standard listed shares, as well as issuers of global depositary receipts, or GDRs, in each case, other than standard listed investment entities and shell companies.

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What should in-scope issuers do?

In-scope issuers should familiarise themselves with LR 14.2.27 and the associated guidance, as well as with the TCFD’s recommendations, to determine if new arrangements need to be introduced to ensure that they can comply with this new rule going forward.

Premium-listed issuers in scope of LR 9.8.6R(8) should also familiarise themselves with the new and amended guidance that will apply for accounting periods beginning on, or after, 1 January 2022.

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What about issuers of debt?