FRC scraps ESG changes to governance code following industry feedback

Includes proposals relating to the role of audit committees on ESG

The Financial Reporting Council (FRC) has decided to take forward fewer than half of its proposed changes to the UK Corporate Governance Code, with many ESG-related proposals dumped, following feedback to its consultation on the issue.

Scrapped proposals include those relating to the role of audit committees on ESG, and modifications to existing code provisions around diversity, over-boarding, and committee chairs engaging with shareholders.

Among these binned proposals was that the remit of audit committees be expanded to include narrative reporting, including sustainability reporting, and where appropriate ESG metrics.

During the consultation period the Chartered Governance Institute had called on the FRC, as the regulator, to provide guidance on how and what companies should report on their climate ambitions and transition plans

Also believed to have been scrapped by the FRC in its updated plans is the linking of remuneration clearly with company performance, purpose, and values, with a specific mention of ESG objectives.

A reference to inclusion, to give equal weight to all protected and non-protected characteristics, and to encourage companies to consider diversity beyond gender and ethnicity, is also thought to have been binned.

Of the 18 originally planned revisions to the FRC Code, changes to internal controls, relating to adequate accounting records and the preparation of financial statements, and risk reports, will form the bulk of the proposed measures taken forward.

There will also be a small number of changes that streamline and reduce duplication associated with the code, in the interests of reducing burdens on companies.

A number of other proposals will also not be taken forward as a result of the government’s recent decision to withdraw its statutory instrument relating to an audit and assurance policy, reporting on distributable profits and resilience statement requirements.

The FRC intends to publish an updated governance code in January 2024.

Richard Stone, chief executive of the Association of Investment Companies (AIC), welcomed more limited changes to the code, on the grounds the original proposals “were disproportionate and poorly targeted”. 

“The FRC has listened to the concerns of business and, while we do not have all the detail, seems to have changed tack accordingly. This is a very positive development but must not be the last word from policymakers on getting the balance of regulation right.”

He added there were still “serious misgivings” about the government’s proposals to require larger listed companies to adopt managed shared audits, or to compel them to appoint challenger audit firms. 

Such rules “would restrict choice”, he said, and be “overly burdensome” on businesses, and would not increase competition in the audit market or enhance the quality of audit services.