FRC research reports

The Financial Reporting Council (FRC) has recently published two research reports, both of which touch on environmental, social and governance (ESG) issues.

Report on the influence of proxy advisors and ESG rating agencies on FTSE 350 companies

In August 2022, the FRC commissioned Morrow Sodali and Durham University to review the impact of proxy voting advisors and ESG rating agencies on the actions and reporting of FTSE 350 companies, and on investor voting. They have now published a report setting out their findings.

The report discusses how investors use proxy voting and ESG research, and has a number of interesting findings from the point of view of both investors and companies. These include:

• the assumed connection between negative voting recommendations from proxy advisors and voting outcomes is less strong than is sometimes suggested; and
• research relating to ESG does inform investor decision making – 72% of the investors which responded to the study said that they used this research in their investment decisions.

The report also notes future work in this area, including initiatives to regulate ESG rating agencies.

Report on Audit Committee Chairs' views on ESG

YouGov was tasked by the FRC with exploring the views of Audit Committee Chairs (ACCs) on, and their approach to, ESG activity and reporting. The YouGov study is based on in-depth interviews conducted with the ACCs of 40 different companies, varying in size from FTSE 100 companies to unlisted entities and operating in a wide range of sectors. Whilst most ACCs view ESG as an important part of good business practice and an area of increasing importance, attitudes vary across the different sectors and according to the availability of resources.

Unsurprisingly, governance was the area in which ACCs had the most advanced understanding and experience. By contrast, some interviewees were critical of what they perceived to be the constant change in relation to reporting standards.

The report also considers the role that the FRC could play to assist companies, with ACCs observing that they would welcome tailored and actionable guidance from the FRC on ESG activities.