FRC scraps ESG policies as audit reforms left out of government agenda

November 8th, 2023

The Financial Reporting Council (FRC) will drop several proposals related to ESG set out in its UK Corporate Governance Code after it was dropped from the government’s legislative agenda for the year ahead.

New corporate rules were dropped from the King’s speech at the opening of parliament, prompting the FRC to scale back its plans to implement all 18 of the proposals in the code.

Among the proposals that have been scrapped, included those relating to the role of audit committees on ESG and modifications to existing code provisions around diversity.

It said the revisions will reduce duplications across the code to lessen the burden of reporting requirements on companies, which was “overwhelmingly” supported by stakeholders.

The updated code will be published in January 2024.

The FRC has also updated its proposed reporting policies and released a report encouraging companies to take a holistic approach to corporate reporting.

Its report, Materiality in practice: applying a materiality mindset, outlines how companies can identify material issues and gives examples where reporting can be streamlined.

In the report, the FRC encouraged companies to review, rank and remove any information that is not relevant to strengthen the value of their reporting, which will be useful for strategic planning and refining controls and processes.

It said this can be useful for strategic planning as well as identifying and refining controls and processes.

The FRC identified three separate lenses that materiality is considered through: quantitative financial thresholds, qualitative financial aspects and sustainability-related information.

It said most companies view the lenses separately, while investors view them holistically and want to understand the business model and strategy in a connected way.

However, understanding how investors and shareholders make decisions is crucial to a materiality assessment, it noted, and companies can benefit from aligning their materiality assessments more with investor needs.

Mark Babington, FRC executive director of regulatory standards, said: “Given the complexity of some corporate reporting, companies should look holistically when deciding what information to give their stakeholders.

“The suggestions in this report are a starting point for an ongoing dialogue on materiality and we look forward to continuing to engage with companies and the investor community on this important issue.”

The report follows the publication of final recommendations from the Taskforce for Nature-related Financial Disclosures (TNFD), including accommodations for different approaches to materiality.