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Investment Association Shareholder Priorities for 2021

On 18 January 2021, the Investment Association (“IA”) published its shareholder priorities for listed companies in 2021.  The publication:

  1. Assesses the progress made by listed companies on the four areas identified by investors as critical drivers of long-term value at the time of publication of the shareholder priorities for 2020;

  2. Sets outs IA member expectations for 2021; and

  3. Describes the approach which its corporate governance research service, the Institutional Voting Information Service (“IVIS”), will take to analyse these issues for companies with year-ends on or after 31 December 2020. This includes a summary of the IVIS questions and colour top approach for 2021.

A copy of the Investment Association Shareholder Priorities for 2021 can be found here.

Findings Against Shareholder Priorities for 2020

In January 2020, the IA published its shareholder priorities for 2020, which outlined four areas identified by investors as critical drivers of long-term value. These were:

The IA considers that the importance of these issues has not diminished through 2020 and during the COVID-19 pandemic noting that:

  • For 2021, the IA has adjusted the 2020 expectations to reflect its findings from the year. This includes a greater focus on capital management and accounting for climate-related matters, COVID-19 specific stakeholder engagement, and a focus on companies’ plans to meet the Parker Review for ethnic diversity on boards.

2021 Expectations – Responding to Climate Change

Investors are looking for more transparency on climate-related metrics and targets

2021 IVIS Approach:

  • TCFD-aligned disclosures will be subject to a colour top approach for the first time for companies in high-risk sectors. IVIS will continue to ask the same questions as in 2020 under all four pillars of TCFD, with additional questions to highlight where companies have linked their capital management plans to their strategy and how they are committing to emissions reduction and Paris alignment

  • Amber Top: IVIS will Amber Top the ESG report of any company in a high-risk sector (defined in the IA publication) that does not address all four pillars of TCFD (Governance; Risk Management; Strategy; Metrics & Targets)

  • For 2021, investors continue to expect all listed companies to report in line with the four pillars of the Task Force on Climate-Related Financial Disclosures (“TCFD”) (governance; risk management; strategy and metrics & targets).

  • The UK Financial Conduct Authority has recently confirmed that TCFD-aligned reporting requirements will apply to commercial companies with a premium listing on a ‘comply or explain’ basis for companies with accounting periods starting on or after 1 January 2021.

  • The UK Joint Regulator and Government Taskforce has set out a road map for mandatory TCFD reporting across the economy by 2025. Pending this date, the IA stresses the importance of improvements to the comprehensiveness, quality and “decision-useful nature” of these disclosures noting that TCFD-aligned disclosures can be complemented by the adoption of the Sustainability Accounting Standards Board (“SASB”) standards and the use of SASB’s sector specific guidance to determine what information is decision-useful for investors.

  • The IA notes that companies should now be considering and communicating to investors whether their business models are ‘Paris-aligned’ i.e. whether their business activities are consistent with achieving net zero emission by 2050 or earlier. Companies should therefore outline their approach to Paris alignment and their strategy for implementing the necessary emissions reductions. Companies can expect increased engagement from investors on their approach and strategy to transitioning to a more sustainable business model while informing more sustainable capital allocation practices.

  • Investors expect companies to clearly identify the directors or committees that are responsible for the oversight and management of a company’s response to climate change. While investors maintain that this is an issue for the whole board, naming individual board members or committees with responsibility provides accountability and leadership on what is considered a critically important issue.

Accounting for Climate Change

Investors expect companies to reflect climate-related matters in their annual report and accounts and for auditors to play an important role in ensuring the annual report and accounts properly reflect climate-related matters. For high-risk sectors, investors expect that auditors will include material climate-related risks as a Key Audit Matter in their auditor’s report

2021 IVIS Approach:

IVIS will highlight to investors those FTSE All-Share companies that include a statement in their annual report and accounts that material climate-related matters have been incorporated

  • The IA flags that under existing accounting and audit requirements, material climate-related matters should be treated the same as any other material factor and incorporated in the financial statements and associated notes. These disclosures should reflect both the physical risks of climate change and the transition risks arising from interventions designed to align with the Paris Agreement and transition the economy to net zero emissions. IA members expect companies to reflect climate-related matters in their annual report and accounts and should consider using the framework and educational guidance provided by the International Accounting Standards Board and the Investor Expectations for Paris-aligned Accounts published by the Institutional Investors Group on Climate Change.

  • Companies will need to consider the potential financial implications arising from climate-related and other emerging matters, which may include, but are not limited to:

    • asset impairment, including goodwill;

    • changes in the useful life of assets;

    • changes in the fair valuation of assets;

    • effects on impairment calculations because of increased costs or reduced demand;

    • changes in provisions for onerous contracts because of increased costs or reduced demand;

    • changes in provisions and contingent liabilities arising from fines and penalties; and

    • changes in expected credit losses for loans and other financial assets.

  • Directors should affirm that the financial impact of climate-related matters have been incorporated into the company’s annual report and accounts by providing a statement in such accounts that the directors have considered the relevance of the risks of climate change and transition risks associated with achieving the goals of the Paris Agreement. The IA has included guidance on what matters this statement should reference.

  • The board should ensure that the financial disclosures and assumptions relevant to climate change are consistent with their narrative reporting against TCFD.

  • In ‘high-risk’ sectors, investors expect that auditors will include material climate-related risks as a Key Audit Matter in their auditor’s report.

  • Companies can continue to expect much greater scrutiny from auditors and investors in relation to climate-related risks and disclosures in their annual report and accounts.

Audit Quality

Investors continue to expect companies meet the 2020 shareholder expectations and demonstrate how they have judged the quality of the audit they have received

2021 IVIS Approach

The IVIS approach for 2021 will remain unchanged from the approach in 2020. IVIS will highlight in which section of the report COVID-19 related engagement have been made by companies

  • In 2020, the IA requested audit committees to clearly disclose how they had ensured that their auditors had delivered a high-quality audit noting that investors rely on the financial information presented in a company’s annual report and accounts to make informed investment decisions. The IA stated that the quality and robustness of the audit are essential to enable investors to make good investment decisions and to hold management and boards to account.

  • Audit committees should declare whether they believe the auditor has provided a high-quality audit, appropriately challenged management, looked at and questioned key accounting issues and explain how the auditor challenged management’s judgement and assertions.

Stakeholder Engagement

Investors continue to expect companies and their boards to identify and disclose their material stakeholders, describe their engagement practices and articulate how stakeholder views have informed and impacted on their decision-making

2021 IVIS Approach:

The IA continues to expect companies to meet the 2020 shareholder expectations and demonstrate how they have judged the quality of the audit they have received. IVIS will continue to ask the same questions on the whether the Committee has demonstrated how it has assessed the quality of the audit and how it has challenged management’s judgements.

The IA will continue to work with companies and audit committees to communicate expectations and showcase effective case studies and to work with BEIS and the FRC to ensure that companies disclose how they judge audit quality. If the IA does not see progress in 2021 IVIS will introduce a colour top approach in 2022.

  • The IA position aligns with the UK Corporate Governance Code requirements to disclose how the board engaged with the workforce to understand the views and concerns of employees. The IA repeated the importance of stakeholder engagement and called on companies to better inform investors as to how they are fulfilling their directors’ duties and taking account of the views of their material stakeholders.

  • Investors continue to expect companies and their boards to:

    • identify and disclose their material stakeholders;

    • decide on the most appropriate mechanisms to engage with those stakeholders;

    • clearly articulate how their views have both informed and impacted their decision-making; and

    • report back to shareholders and stakeholders on the engagement undertaken, the views heard and how they have impacted on board decision-making.

  • The IA acknowledges that the COVID-19 pandemic has significantly impacted companies and their stakeholders and that it will be a common issue which all companies will have had to address in 2020. Investors will expect companies to make quality disclosures outlining the approach taken to engaging, communicating and supporting the company’s stakeholders during the pandemic. This should also include how the board reflected the views of their stakeholders in key decision-making.


Investors continue to expect companies to take actions to improve gender and ethnic diversity on their boards. This should include greater consideration of how the board reflects their employee base and the consumers and communities they serve

2021 IVIS Approach:

Amber Top: IVIS will amber top any FTSE 350 companies that do not disclose either the ethnic diversity of their board or the credible action plan they have in place to achieve the Parker Review targets

Red Top: IVIS will red top the Corporate Governance Report of FTSE350 companies that: (i) have female representation of 30% or less on their board, and (ii) have female representation of 25% or less on their Executive Committee

  • In 2020, the IA called on companies to continue to improve diversity across their board, senior leadership and throughout the workforce. While this should apply to diversity in all its forms, investors were particularly focused on gender and ethnic diversity as strong indicators of a company’s overall approach. The IA considers that companies that fully embrace diversity will be better equipped to foresee and act on risks and opportunities, make better long-term decisions, nurture talent and command the trust of the consumers they serve. These companies, it is believed, will ultimately deliver better long-term returns for investors.

  • The IA believes significant progress is needed on the ethnic diversity of UK plc boards and expects companies to take actions to improve the ethnic diversity of their boards. The IA states actions to identify and appoint directors to reach the Parker Review target of ‘one by 21’ (every FTSE 100 board should have at least one director from an ethnic minority background by 2021, and every FTSE 250 board by 2024) are needed urgently.

  • A credible action plan to reach the Parker Review target should be communicated by companies to investors. The IA noted that shareholders would also benefit from disclosure of the ethnicity breakdown of the executive committee and their direct reports, aligned with the Change the Race Ratio initiative.

  • The IA warns that companies should not view the end of the Hampton-Alexander Review cycle as an end to investor focus on diversity. Companies can expect investors to keep up the pressure on those companies that are still falling short of the Hampton-Alexander targets. Companies should continue to identify and disclose their targets for improving the gender diversity of their boards and leadership teams and the timeframe in which they will seek to achieve those targets. Progress against these targets should also be disclosed.

© Copyright 2020 Squire Patton Boggs (US) LLP
National Law Review, Volume XI, Number 22

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