Corporate Governance and Business Ethics

1. The UK Corporate
Governance Code
2024
Learning Objective

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3.1.1 Understand the five main sections of the
UK Corporate Governance Code (2024) and
the underlying principles relating to: board
leadership and company purpose; division
of responsibilities; composition, succession
and evaluation; audit, risk and internal
control; remuneration

1.1 The History and

Background of the UK
Corporate Governance
Code
‘Corporate governance is the system by
which companies are directed and controlled.
Boards of directors are responsible for
the governance of their companies. The
shareholders’ role in governance is to appoint
the directors and the auditors and to satisfy
themselves that an appropriate governance
structure is in place. The responsibilities of the
board include setting the company’s strategic
aims, providing the leadership to put them
into effect, supervising the management of
the business and reporting to shareholders
on their stewardship. The board’s actions
are subject to laws, regulations and the
shareholders in general meeting’.

Source of information: [Link]

documents/UK_Corporate_Governance_Code_2024_
[Link]
Good governance should facilitate efficient,
effective and entrepreneurial management that can
deliver long term shareholder. The UK Corporate
Governance Code (the Code) is published by the
Financial Reporting Council (FRC) to support these
outcomes and promote confidence in corporate
reporting and governance.

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The Code orginated from the recommendations of the Cadbury, Greenbury, and Hampel reports
in the 1990s, which addressed corporate accountability and directors’ remuneration. Additional
recommendations came from the Higgs report on the role of non-executive directors (NEDs), and the
Smith report on audit committees, forming the Combined Code on Corporate Governance. However,
the global financial crisis of 2007–08 led to widespread criticism of governance systems. In response, Sir
David Walker conducted a review of the governance of banks and other financial institutions in th UK.
The FRC initiated a review of the Code alongside the Walker Review to evaluate corporate governance
in listed companies generally.

The review’s conclusions were reported in late 2009, leading to a revised edition of the Code, now
called the UK Corporate Governance Code, incorporating recommendations from the Walker Review.
The main conclusions emphasised the importance of adhering to the spirit of the Code and the letter,
and enhancing shareholder engagement in monitoring the Code through better interaction between
company boards and shareholders. To support this, the FRC developed the Stewardship Code, focusing
on shareholders’ roles in corporate governance, which is discussed in section 3.1.

The UK Corporate Governance Code applies to all companies with a listing of equity shares in the UK,
whether incorporated in the UK or overseas.

The latest edition of the Code was published in 2024, and came into effect on 1 January 2025.

1.2 The Status and Structure of the UK Corporate Governance

Code (2024)
Learning Objective

3.1.1 Understand the five main sections of the UK Corporate Governance Code (2024) and the
underlying principles relating to: board leadership and company purpose; division of
responsibilities; composition, succession and evaluation; audit, risk and internal control;
remuneration
3.1.2 Know to which companies the UK Corporate Governance Code (2024) applies; the ‘comply and
explain approach’
3.2.1 Know the main principles of the QCA Corporate Governance Code; which companies may
choose to adopt the QCA Corporate Governance Code; the ‘comply or explain’ approach to
QCA corporate governance

The Code is not a rigid set of rules, and there is no legal obligation for compliance. Instead, it serves as a
guide to the elements of good board practice, developed through extensive consultation and years of
experience. The Code is organised into five sections and includes 18 principles and 41 provisions.

The Code itself is not part of the Listing Rules. However, the UK Listing Rules (UKLR 6.6.6(3)) requires
companies listed in the UK to include a corporate governance report (the disclosure statement) in their
annual report and accounts. Firstly, this report must describe how the company has complied with the
main principles of the Code. Secondly, it must indicate whether the company has complied with all
the provisions, identify any provisions it has not complied with, specify the period of non-compliance

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for ongoing provisions, and explain the reasons for any non-compliance. These descriptions together
should provide shareholders with a clear and comprehensive picture of the company’s governance
arrangements in relation to the Code as a standard of good practice.

Although it is expected that companies will comply wholly or substantially with the main principles, it
is recognised that non-compliance with specific provisions of the Code may be justified in particular
circumstances if good governance can be achieved by other means. A condition of non-compliance is

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that the reasons for it should be explained to shareholders. Shareholders who may wish to discuss these
reasons with the company and their voting intentions may be influenced as a result. The company must
provide shareholders with a clear and detailed explanation, which shareholders should evaluate on its
merits. In providing an explanation, the company should illustrate how its actual practices align with the
principle to which the specific provision relates and contributes to good governance.

Comply or Explain’ Approach to UK Corporate Governance

The Code’s provisions should be followed on a ‘comply’ or ‘explain’ basis. This means that a company
may find that an alternative approach, better suited to achieving good governance, may be more
beneficial than strictly adhering to the provision in the Code. Therefore, the company must explain in its
annual report the justification and reasoning for taking this alternative approach.

This comply or explain approach, and the flexibility it offers, is valued by both company boards and
investors in promoting better corporate governance

Smaller listed companies may determine that some provisions are disproportionate or less relevant to
their circumstances, and certain provisions do not apply to companies below the FTSE 350. Moreover,
the Code is voluntary for standard listed companies or those quoted on AIM or the Aquis Growth
Market. Nonetheless, such companies may consider adopting the approach in the Code, and they
are encouraged to do so. Externally managed investment companies typically have a different board
structure, which may affect the relevance of particular provisions. The Association of Investment
Companies Corporate Governance Code and Guide can assist these companies in meeting their
obligations under the Code. The Quoted Companies Alliance provides an alternative, simpler standard
for companies quoted on AIM or the Aquis Growth Market, which is covered further below.

The Code is divided into five sections:

1. Board Leadership and Company Purpose – guidance on leadership, strategy and policy from and
of the board.
2. Division of Responsibilities – within the board.
3. Composition, Succession and Evaluation – within the board.
4. Audit, Risk and Internal Control – policies of the company and the board.
5. Remuneration – of the board.

1.2.1 Board Leadership and Company Purpose

The main principles under this section are as follows:

• A successful company is led by an effective and entrepreneurial board, whose role is to promote the
long-term sustainable success of the company, generating value for shareholders and contributing
to wider society.

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• The board should establish the company’s purpose, values and strategy, and satisfy itself that these
and its culture are aligned. All directors must act with integrity, lead by example and promote the
desired culture.
• The board should ensure that the necessary resources are in place for the company to meet its
objectives and measure performance against them. The board should also establish a framework of
prudent and effective controls, which enable risk to be assessed and managed.
• In order for the company to meet its responsibilities to shareholders and stakeholders, the board
should ensure effective engagement with, and encourage participation from, these parties.
• The board should ensure that workforce policies and practices are consistent with the company’s
values and support its long-term sustainable success. The workforce should be able to raise any
matters of concern.
The provisions are focused on the business model and risks, company culture, regular engagement
with shareholders, addressing and engaging with shareholder opposition and ensuring concerns are
recorded in board minutes.

Source of information: [Link]

[Link]

1.2.2 Division of Responsibilities

The main principles under this section are as follows:

• The chair leads the board and is responsible for its overall effectiveness in directing the company.
They should demonstrate objective judgement throughout their tenure and promote a culture of
openness and debate. In addition, the chair facilitates constructive board relations and the effective
contribution of all non-executive directors, and ensures that directors receive accurate, timely and
clear information.
• The board should include an appropriate combination of executive and non-executive (and, in
particular, independent non-executive) directors, such that no one individual or small group
of individuals dominates the board’s decision-making. There should be a clear division of
responsibilities between the leadership of the board and the executive leadership of the company’s
business.
• Non-executive directors should have sufficient time to meet their board responsibilities. They should
provide constructive challenge, strategic guidance, offer specialist advice and hold management to
account.
• The board, supported by the company secretary, should ensure that it has the policies, processes,
information, time and resources it needs in order to function effectively and efficiently.

It should be noted that the independence of a director is referenced by other current or recent
connections to the company or its executive directors, such as employment, shareholdings, commercial
arrangements or familial relations.

The provisions in this section focus on the independence of the chair and the non-executive directors.
The non-executive directors (NEDs) have the primary role in appointing and removing executive
directors. The written responsibilities of the board and committee should be clear, there should be
sufficient time for board responsibilities, and all directors should have access to the company secretary.

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Note that the 50% minimum requirement for non-executive membership does not apply to all UK
boards. For example, for UK funds, the board NED membership requirement is only 25%.

Source of information: [Link]

[Link]

1.2.3 Composition, Succession and Evaluation

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The main principles under this section are as follows:

• Appointments to the board should be subject to a formal, rigorous and transparent procedure,
and an effective succession plan should be maintained for board and senior management. Both
appointments and succession plans should be based on merit and objective criteria. They should
promote diversity, inclusion and equal opportunity.
• The board and its committees should have a combination of skills, experience and knowledge.
Consideration should be given to the length of service of the board as a whole and membership
regularly refreshed.
• Annual evaluation of the board should consider its composition, diversity and how effectively
members work together to achieve objectives. Individual evaluation should demonstrate whether
each director continues to contribute effectively.

The provisions in this section are focused on the use of effective board committees for nominations
and remuneration. All directors are subject to annual re-election, and the tenure of the chair should
not extend beyond nine years. The use of open advertising and an external search for the appointment
of the chair and NEDs is encouraged. There should be a rigorous assessment of the performance and
suitability of the board, committees, the chair, and individual directors, with full disclosure of the
nomination committee’s work.

Source of information: [Link]

[Link]

1.2.4 Audit, Risk and Internal Control

The main principles under this section are as follows:

• The board should establish formal and transparent policies and procedures to ensure the
independence and effectiveness of internal and external audit functions and satisfy itself on the
integrity of financial and narrative statements.
• The board should present a fair, balanced and understandable assessment of the company’s
position and prospects.
• The board should establish procedures to manage risk, oversee the internal control framework, and
determine the nature and extent of the principal risks the company is willing to take in order to
achieve its long-term strategic objectives.

The provisions in this section focus on the establishment and effectiveness of the audit committee in
performing its various roles and responsibilities. This includes providing advice on whether the annual
report and accounts are fair, balanced, and understandable, and disclosing significant issues. It also
covers the directors’ responsibility statement for the annual report and accounts, the robust assessment

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of emerging and principal risks, monitoring of risk management and internal control systems, and the
going concern and viability statement.

Source of information: [Link]

[Link]

1.2.5 Remuneration
The main principles under this section are as follows:
• Remuneration policies and practices should be designed to support strategy and promote long-term
sustainable success. Executive remuneration should be aligned with company purpose and values, and be
clearly linked to the successful delivery of the company’s long-term strategy.
• A formal and transparent procedure for developing policy on executive remuneration and
determining director and senior management remuneration should be established. No director
should be involved in deciding their own remuneration outcome.
• Directors should exercise independent judgement and discretion when authorising remuneration
outcomes, taking account of the company and individual performance, and wider circumstances.

Source of information: UK Corporate Governance Code 2024

1.2.6 Diversity
One of the sections of the Code is titled ‘Composition, Success and Evaluation’ with a principle (‘J’) that
states appointments and succession plans should:

‘promote diversity, inclusion and equal opportunity’.

Furthermore, another principle (‘L’) requires an annual evaluation which looks at the role of diversity in
achieving objectives.

In 2023, the Code was updated to enhance the Code’s effectiveness in promoting good corporate
governance. The changes to the Code, which came into effect on 1 January 2025 include:

• Setting out a revised framework of prudent and effective controls to provide a stronger basis for
reporting on, and evidencing their effectiveness.
• Improving the functioning of comply or explain, taking account of recently published FRC research
and reports.
• Making necessary revisions to reflect the responsibilities of the board and audit committee for
sustainability and ESG reporting, and associated assurance in accordance with a company’s audit
and assurance policy.
• Updating the Code to ensure that it aligns with changes to legal and regulatory requirements as set
out in the Government’s response to the White Paper, including strengthening reporting on malus
and clawback arrangements.

1.3 The Quoted Companies Alliance (QCA) Corporate Governance Code

Companies quoted on AIM are required to follow a recognised corporate governance code on a ‘comply
or explain’ basis. According to the QCA website ([Link]), 89% of AIM companies follow the QCA
Corporate Governance Code as at 22 August 2023.

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 Corporate Governance and Business Ethics

While no corporate governance code is currently compulsory for either standard listed or Aquis Growth
Market companies, many adopt the QCA Code as a simpler alternative to the UK Corporate Governance
Code. For certain larger AQSE Growth Market companies, it is being made compulsory to adopt a code.
Although the QCA Code is similar in its broad approach to the UK Corporate Governance Code, it is
somewhat less prescriptive and based on ten principles:

1. Establish a strategy and business model which promotes long-term value for shareholders.

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2. Seek to understand and meet shareholder needs and expectations.
3. Take into account wider stakeholder and social responsibilities and their implications for long-term
success.
4. Embed effective risk management, considering both opportunities and threats, throughout the
organisation.
5. Maintain the board as a well-functioning, balanced team led by the chair.
6. Ensure that between them, the directors have the necessary up-to-date experience, skills and
capabilities.
7. Evaluate board performance based on clear and relevant objectives, seeking continuous
improvement.
8. Promote a corporate culture that is based on ethical values and behaviours.
9. Maintain governance structures and processes that are fit for purpose and support good decision-
making by the board.
10. Communicate how the company is governed and is performing by maintaining a dialogue with
shareholders and other relevant stakeholders.

1.4 The Wates Corporate Governance Principles

Learning Objective

3.3.1 Know the Wates Corporate Governance Principles and to which companies they apply

The Wates Principles provide a framework to help large private companies raise their standards of
corporate governance by offering a structure for reporting to fulfil their legal requirements and
demonstrate good practice.

Under The Companies (Miscellaneous reporting) Regulations 2018 private companies of certain size
(satisfying either or both of the following conditions – more than 2,000 employees and/or a turnover
of more than £200 million and a balance sheet of more than £2 billion) are required to disclose
their corporate governance arrangements in their directors’ report and on their website, including
information on whether they follow a formal code.

The six principles are:

• Purpose and Leadership – purpose, values and culture, strategy.

• Board Composition – balance and diversity, size and structure, effectiveness.
• Director Responsibilities – accountability, integrity of information.

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• Opportunity and Risk – opportunity, risk, responsibilities.
• Remuneration – setting remuneration, policies, delegating remuneration decisions, subsidiary
companies.
• Stakeholder Relationships and Engagement – external impacts, stakeholders, workforce.

Stakeholder engagement is a key theme that runs throughout the Principles. Companies must outline
their methods of engagement with both their workforce and other stakeholders and be able to
demonstrate that these issues have been raised and considered by the board.

1.5 The UK Stewardship Code

Learning Objective

3.4.1 Know the principles of the UK Stewardship Code

The Code is aimed at institutional investors and operates alongside the UK Corporate Governance Code
for listed companies.

The UK Stewardship Code 2020 defines ‘stewardship’ as:

‘…the responsible allocation, management and oversight of capital to create long-term value for
clients and beneficiaries leading to sustainable benefits for the economy, the environment and
society.’

The UK Stewardship Code 2020 and the reporting of its application are voluntary. It sets a standard
higher than the minimum regulatory standard. However, the Annex to the Code highlights selected
regulatory requirements for asset owners, asset managers, and service providers, indicating where
signatories can use their reports to meet such requirements.

Under COBS 2.2.3, all UK-authorised asset managers must produce a statement of commitment to the
UK Stewardship Code or explain why it is not appropriate to their business model.

The UK implementation of the Shareholder Rights Directive (EU 2017/828) (SRD II) overlaps with the
Stewardship Code. The FCA has stated that firms may wish to provide their SRD II disclosures in the same
document as their reporting under the UK Stewardship Code 2020. However, the FCA Policy Statement
PS19/13 in 2019 noted that,

‘Firms will need to consider whether the disclosures they make under the Stewardship Code are
sufficient to meet their obligations under our rules.’

The UK Stewardship Code 2020 sets out standards for asset owners and asset managers, and service
providers (such as proxy advisers, investment consultants and data and research providers).

There are specific principles for asset owners and principles for service providers.

The code recognises the importance of environmental, social and governance factors (including climate
change to investors.

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The principles for asset owners and asset managers are listed in the page that follows:

• Purpose, strategy and culture – signatories’ purpose, investment

beliefs, strategy and culture enable stewardship that creates long-
term value for clients and beneficiaries, leading to sustainable
benefits for the economy, the environment and society.
• Governance, resources and incentives – signatories’ governance,

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resources and incentives support stewardship.
Purpose and
• Conflicts of interest – signatories manage conflicts of interest to
Governance
put the best interests of clients and beneficiaries first.
• Promoting well-functioning markets – signatories identify and
respond to market-wide and systemic risks to promote a well-
functioning financial system.
• Review and assurance – signatories review their policies, assure
their processes and assess the effectiveness of their activities.
• Client and beneficiary needs – signatories take account of
client and beneficiary needs and communicate the activities and
outcomes of their stewardship and investment to them.
• Stewardship, investment and ESG integration – signatories
Investment Approach
integrate systematically stewardship and investment, including
material ESG issues, and climate change, to fulfil their responsibilities.
• Monitoring managers and service providers – signatories monitor
and hold to account managers and/or service providers.
• Engagement – signatories engage with issuers to maintain or
enhance the value of assets.
• Collaboration – signatories, where necessary, participate in
Engagement
collaborative engagement to influence issuers.
• Escalation – signatories, where necessary, escalate stewardship
activities to influence issuers.
Exercising Rights and • Exercising rights and responsibilities – signatories actively
Responsibilities exercise their rights and responsibilities.

The principles for service providers are listed below:

Signatories’ purpose, strategy and culture enable them to promote

Purpose, strategy and culture
effective stewardship.
Governance, resources and Signatories’ governance, workforce, resources and incentives
incentives enable them to promote effective stewardship.
Signatories identify and manage conflicts of interest and put the
Conflicts of interest
best interests of clients first.
Promoting well-functioning Signatories identify and respond to market-wide and systemic
markets risks to promote a well-functioning financial system.
Signatories support clients’ integration of stewardship and
Supporting client’s
investment, taking into account material ESG issues, and
stewardship
communicating what activities they have undertaken.
Review and assurance Signatories review their policies and assure their processes.

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Source of information: FRC website ([Link]
pdf)

The purpose of the Code is to improve the quality of corporate governance by promoting better
dialogue between shareholders and company boards, and increasing transparency about how investors
oversee the companies they own.

The FRC is set to become the Audit Reporting and Governance Authority (ARGA), This transition will
continue the work on the recommendations from the Independent Review of the FRC, the Competition
and Markets Authority (CMA) review and Sir Donald Brydon’s review, into the quality and effectiveness
of audits.

While primary legislation is required to create ARGA and to give it formal powers, the FRC continues to
work closely with theSecretary of State and BEIS to advance many of the recommendations without the
need for legislative changes.

2. Environmental, Social and Governance (ESG)

Learning Objective

3.5.1 Know ESG requirements for corporate finance firms: UK Corporate Governance Code (2024); the
ESG sourcebook ESG 1.1); the strategic report under the Companies Act Section 172

2.1 Environmental, Social and Governance (ESG)

There are expectations about how investment and stewardship are integrated, including environmental,
social and governance (ESG) issues. The following provides background to the concepts, trends and
standards that are being developed.

The 2024 version of the UK Governance Code incorporates ESG factors within Principle A:

• A successful company is led by an effective and entrepreneurial board, whose role is to promote the
long-term sustainable success of the company, generating value for shareholders and contributing
to wider society.

Within the UK Stewardship Code 2020, there are a number of ESG factors to consider, including the
definition of stewardship – which is defined as:

‘…the responsible allocation, management and oversight of capital to create long-term value for
clients and beneficiaries leading to sustainable benefits for the economy, the environment and
society’.

The introduction to the UK Stewardship Code 2020, includes the following statement:

‘Environmental, particularly climate change, and social factors, in addition to governance, have
become material issues for investors to consider when making investment decisions and undertaking
stewardship.’

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 Corporate Governance and Business Ethics

Specific principles within the UK Stewardship Code 2020, such as Principles 1 & 7 for Asset Owners and
Asset Managers, explicitly reference ESG factors:

• Purpose, strategy and culture (Principle 1) – signatories’ purpose, investment beliefs, strategy,
and culture enable stewardship that creates long-term value for clients and beneficiaries, leading to
sustainable benefits for the economy, the environment and society.
• Stewardship, investment and ESG integration (Principle 7) – signatories systematically integrate

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stewardship and investment, including material ESG issues, and climate change, to fulfil their
responsibilities.

Signatories should disclose the material ESG issues they have prioritised for assessing investments, prior
to holding, monitoring through holding, and exiting.

For service providers, Principle 5 explicitly references ESG factors:

• Supporting client’s stewardship (Principle 5) – signatories support clients’ integration of

stewardship and investment, taking into account material ESG issues, and communicating what
activities they have undertaken.

2.2 Know How ESG is Reflected in the Strategic Report under the
Companies Act Section 172
Within the UK (excluding those reporting under the small companies regime), there are requirements
to report on non-financial aspects in the strategic report and directors’ report (Sections 414A to 414D
of the Companies Act 2006). This includes the provision of the Section 172 (1) Statement for relevant
companies.
The content requirements for the strategic report are based on:

• Section 414C – which sets out the overall framework and main principles for the content of the
strategic report.
• Section 414CB – which relates to the contents of the non-financial information statement.
• Section 414CZA – which relates to the Section 172(1) statement.

The scope of application of sections 414CB (NFI) and 414CZA (Section 172 (1) Statement) differ and
apply to different categories of companies. Certain types of companies have additional or reduced
reporting requirements depending on their category:

• Public Interest Entity (PIE) – a traded company, a banking company, an authorised insurance
company, and a company carrying on insurance market activity.
• Quoted companies (with less than 500 employees).
• Quoted companies (with over 500 employees).
• Large and medium-sized private companies and qualifying partnerships (other than PIEs with over
500 employees).

Section 414CB (NFI) applies to PIEs, and Section 414CZA (Section 172 (1) Statement) relates to large
companies.

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According to guidance issued by the FRC regarding the Strategic Report (July 2018)1 for non-PIEs, the
notes state:

‘To the extent necessary for an understanding of the development, performance or position of the
entity’s business, the strategic report must include information about:

a. environmental matters (including the impact of the entity’s business on the environment)
the entity’s employees, and
b. social and community and human rights issues, including information about any policies of the
entity in relation to those matters and the effectiveness of those policies.
[For quoted companies], if the report does not contain information of each kind mentioned in
paragraphs (a)–(c), it must state which of those kinds of information it does not contain.’

For PIEs, Section 414CB provides the contents of the NFI Statement:

1. The non-financial information statement must contain information, to the extent necessary for an
understanding of the company’s development, performance and position and the impact of its
activity, relating to, as a minimum:
a. environmental matters (including the impact of the company’s business on the environment)
b. the company’s employees
c. social matters
d. respect for human rights, and
e. anti-corruption and anti-bribery matters.

2. The information must include:

a. a brief description of the company’s business model
b. a description of the policies pursued by the company in relation to the matters mentioned
in subsection (1)(a) to (e) and any due diligence processes implemented by the company in
pursuance of those policies
c. a description of the outcome of those policies
d. a description of the principal risks relating to the matters mentioned in subsection (1)(a) to (e)
arising in connection with the company’s operations and, where relevant and proportionate:
i. a description of its business relationships, products and services which are likely to cause
adverse impacts in those areas of risk
ii. a description of how it manages the principal risks, and
e. a description of the non-financial key performance indicators relevant to the company’s
business.

For large companies, Section 414CZA requires a Section 172 (1) Statement. It states that:

‘A strategic report for a financial year of a company must include a statement (a ‘section 172(1)
statement’) which describes how the directors have had regard to the matters set out in section
172(1)(a) to (f) when performing their duty under section 172’.

As a reminder, Section 172 relates to the duty to promote the success of the company:

1 [Link]
[Link]

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1. A director of a company must act in the way it considers, in good faith, would be most likely to
promote the success of the company for the benefit of its members as a whole, and in doing so have
regard (among other matters) to:
a. the likely consequences of any decision in the long-term
b. the interests of the company’s employees
c. the need to foster the company’s business relationships with suppliers, customers and others
d. the impact of the company’s operations on the community and the environment

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e. the desirability of the company maintaining a reputation for high standards of business
conduct, and
f. the need to act fairly as between members of the company.

There is no single template for a Section 172 (1) Statement, however, the FRC does provide guidance.
They suggest that companies will probably want to include information on the following:

• The issues, factors and stakeholders the directors consider relevant in complying with section 172
(1) (a) to (f) and how they have formed their opinion.
• The main methods the directors have used to engage with stakeholders and understand the issues
to which they must have regard.
• Information on the effect of that regard on the company’s decisions and strategies during the
financial year.

Among various other requirements in Sections 414A to 414D, large-sized private companies with over
250 employees are required to provide the following:
• A statement:
a. describing the action that has been taken during the financial year to introduce, maintain or
develop arrangements aimed at:
i. providing employees systematically with information on matters of concern to them as
employees
ii. consulting employees or their representatives on a regular basis so that the views of
employees can be taken into account in making decisions which are likely to affect their
interests
iii. encouraging the involvement of employees in the company’s performance through an
employees’ share scheme or by some other means
iv. achieving a common awareness on the part of all employees of the financial and economic
factors affecting the performance of the company
b. summarising:
i. how the directors have engaged with employees, and
ii. how the directors have had regard to employee interests, and the effect of that regard,
including on the principal decisions taken by the company during the financial year.
• A statement describing the company’s policy regarding the hiring, continuing employment and
training, career development and promotion of disabled persons.

Among various requirements within Sections 414A to 414D, large-sized private companies with over
500 employees are required to provide the following:

• Where appropriate, analysis using key performance indicators, including information relating to
environmental matters and employee matters (Section 414C(4)(b)).
• Matters otherwise required by regulations made under s416(4) to be disclosed in the directors’
report that the directors consider are of strategic importance to the company (s414C (11).

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• A statement (a Section 172(1) statement) which describes how the directors have had regard to the
matters set out in Section 172(1)(a) to (f) when performing their duty under Section 172.

The Section 172 report for private (unquoted) companies must also be published on their website.

2.3 Know the Purpose and Application of the ESG Sourcebook (ESG
1.1 Purpose and ESG 1.2 Application)
The ESG sourcebook sets out rules and guidance concerning a firm’s approach to environmental, social
and governance matters. It is located in the Business Standards block within the FCA Handbook, and
reflects the Disclosure of Climate-Related Financial Information (Asset Manager and Asset Owner)
Instrument 2021 (FCA 2021/62).

The aim of the ESG sourcebook is to achieve the following outcomes:

1. Better outcomes for clients and consumers through greater transparency on how firms are
managing climate-related risks and opportunities in their investment decisions.
2. Deeper consideration of climate-related risks and opportunities by in-scope firms.
3. Set out the ‘anti-greenwashing’ rules and guidance which apply when a firms is making
sustainability claims, references or characteristics of a product of service.
4. Set out requirements when a firm makes use of sustainability labelling in relation to
sustainability products.

ESG 2 relates to the disclosure of climate-related financial information consistent with the Task Force on
Climate Related Financial Disclosures (TCFD) Recommendations and Recommended Disclosures. These
will relate to the assets that a firm manages or administers generally or assets relating to particular
financial products or services. Firms are obliged to publish a TCFD entity report, consistent with the
TCFD recommendations and recommended disclosures, on an annual basis by 30 June each year.

A firm is exempt from the disclosure requirements under ESG 2 if and for as long as the assets under
administration or management in relation to its TCFD in-scope business amount to less than £5 billion
calculated as a 3-year rolling average on an annual assessment.
According to ESG 1.1.5, the FCA acknowledges the developing status of data and methodologies in the
rulebook:

‘The FCA recognises that at least for a transitional period there may be data and methodological
challenges. Nevertheless, we expect firms to provide sufficient information to clients and consumers.
Firms should still disclose metrics and quantitative scenario analysis or examples in accordance with
the rules in this sourcebook where such disclosure would remain fair, clear and not misleading. Firms
should also appropriately explain any limitations on their ability to disclose and the steps being
taken to address those limitations.’

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 Corporate Governance and Business Ethics

ESG 1.2 describes the application of the sourcebook and the in-scope business in a table extracted
below:

Column 1: Type of firm Column 2: TCFD in-scope business

Part A: Asset Managers
Any firm Portfolio management

3
UK UCITS management company Managing a UK UCITS
ICVC that is a UCITS scheme without a Managing a UK UCITS
separate management company
Full-scope UK AIFM Managing an AIF
Small authorised UK AIFM Managing an AIF
Part B: Asset Owners
Insurer or pure reinsurer Providing insurance-based investment products
Operating a personal pension scheme (excluding a
SIPP) or stakeholder pension scheme
Operating a SIPP, but only in relation to SIPPs
containing insurance-based investment products
provided by the firm
Other asset owners (other than insurers or Operating a personal pension scheme (excluding a
pure reinsurers) SIPP) or stakeholder pension scheme
Operating a SIPP, but only in relation to SIPPs
containing any of the following provided by the
firm:

• a unit
• an interest in a closed-ended investment fund
• a pre-set investment portfolio

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