FRC set to revise Corporate Governance Code

The Financial Reporting Council (FRC) plans to review the UK Corporate Governance Code to focus on the need for companies to consider how they benefit wider society, following calls from a government advisory group for more support in developing a culture of social impact investment

The FRC said it welcomed the recommendations of the advisory group set up by the Treasury and DCMS, chaired by Elizabeth Corley, vice chair of Allianz Global Investors. The regulator plans to consult on changes to the Corporate Governance Code, including the need for companies to link corporate governance to purpose, undertake engagement with wider stakeholders, and consider how they benefit wider society.

The date for the consultation’s release has yet to be announced, but the FRC says it will include questions about the future direction of the UK stewardship code, including the extent to which the interests of wider stakeholders, and broader social impact, including environmental, social and governance factors are integrated into engagement and monitoring by investors.

A survey of 1,800 individuals showed that 56% had at least a moderate interest in impact investing, but only 9% had already invested. The advisory group was asked to look into the reasons for that failure and recommend potential solutions.

Reasons for a lack of investable products include the fact that social impact investment opportunities can be difficult to identify and crystallize; many are early stage, implying material credit and liquidity risk. In addition, there is sometimes a challenge in explaining social impact intentions to investors who think more in financial terms. Consistent measurement of track record and non-financial returns are still a work in progress.

The report identifies five key action areas, one of which is to strengthen competence and confidence within the financial services industry. It recommended that regulators and other statutory bodies, including the Financial Conduct Authority (FCA), Financial Ombudsman Service (FOS), Prudential Regulation Authority (PRA), The Pensions Regulator (TPR) and the Financial Reporting Council (FRC), should continue to build capability in relation to social impact considerations so that, as the market develops, social impact is embedded in regulatory frameworks and understanding.

Secondly, the report recommended that the financial services industry should develop consistent non-financial reporting methods to provide better reporting of social outcomes.

The group called for the Department for Business, Energy and Industrial Strategy (BEIS) to explore, with the FRC, how best to encourage UK business to increase transparency on the contribution business makes towards the achievement of the UN sustainable development goals (SDGs.). Separately, in regard to the FRC consultation on companies' strategic report, the FRC should explore ways in which material information, useful to wider stakeholders, can be reported in the context of the UN SDGs.

The other recommendations were to improve deal flow and the ability to invest at scale; make it easier for people to invest; and maintain momentum and build cohesion across initiatives.

The FRC’s recent consultation on amendments to the guidance on the strategic report encouraged companies to consider the impact of their activities on a wider group of stakeholders and those matters that contribute to the long term success of the company.

The regulator said it is currently reviewing the responses to its consultation and developing guidance which will take into account BEIS’s revision of reporting regulations requiring companies to explain how their directors comply with the requirement of Section 172.

Growing a culture of social impact investing in the UK is here

Report by Pat Sweet

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