The update is a result of the government changing regulations on reporting, and not an initiative driven by the FRC itself. The two key regulation changes are the Non-Financial Reporting Directive and the new requirement for reporting on section 172 of the Companies Act.
Non-Financial Reporting Directive
The Non-Financial Reporting Directive requires certain companies to disclose information on its impact on environmental, employee, social, respect for human rights, anti-corruption and anti-bribery issues. These issues will need to be considered in the description of the company’s business model, the discussion of the policies of the company on these issues and disclosures on the principal risks and how they are mitigated.
The disclosures of this information will allow shareholders to understand and assess the long-term value creation of the business, the sustainability of the company’s business model and the impacts the business has on wider society. By providing this information, shareholders and potential investors will be able to make better decisions on the level of shareholding that they have in the company and will inform their conversations with, and questioning of, senior management and the board of the company.
Section 172 of the Companies Act
The government has revised section 172 of the Companies Act so that companies will have to report on how the directors have had regard for the matters in section 172 when they have been carrying out their duty to promote the success of the company. This requirement will apply to financial years beginning on or after 1 January 2019. Section 172 requires directors to consider the interests of wider stakeholders, such as employees, customers, and suppliers, when making decisions that will impact on the future success of the business. This new reporting regulation will require directors to explain the engagement that they have had with these wider stakeholders and how this engagement has influenced key decisions made during the year.
The guidance on the Non-Financial Reporting Directive and Section 172 has a lot of elements that are present in the International Integrated Reporting Council’s Integrated Reporting Framework. It is clear from the Annual Reports that have been produced following the Integrated Reporting Framework that is very difficult to discuss sustainability issues meaningfully and weave them throughout the Annual Report unless sustainability is integral to the thinking and decision-making of senior management and the board. Therefore, if companies want to meet the regulations and follow the Guidance on the Strategic Report, then they need to consider not just how they report, but also how the business is managed. Reporting can be a useful tool for driving these considerations. By needing to gather data and considering how to discuss the business in relation to sustainability disclosures, this can encourage directors and senior management to have the right conversations, adapting the way they run the business and leading to sustainability issues being at the heart of both the business and its Annual Report.
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