Observing Diversity and Inclusion Disclosure Requirements for Listed Companies

In this Pride month, we look at the reporting obligations imposed on listed companies regarding Environmental, Social and Governance (“ESG”) related matters, particularly in relation to diversity and inclusion.

In September 2022, the Financial Reporting Council released a report on ethnic diversity among senior leadership for people from minority ethnic groups in FTSE 100 and FTSE 250 companies which showed that while there are still significant challenges to be addressed, the need for change has been taken seriously across the spectrum, including by senior managers, executive leaders, board chairs and executive search consultants.

The Financial Conduct Authority (“FCA”) is responsible for monitoring, and where necessary, enforcing compliance with ESG matters including diversity and inclusion on company boards of companies with shares traded on the Main Market of the London Stock Exchange, and for determining an appropriate supervisory approach.

In April 2022, the FCA introduced amendments which require listed companies to disclose in their annual financial report whether they meet specific board diversity targets relating to sex or gender and ethnicity on a “comply or explain” basis and to publish standardised data on the composition of their board and most senior level of executive management by sex or gender and ethnic background. To encourage a broader consideration of diversity at board level, the FCA further requires that consideration should be given to wider diversity characteristics such as ethnicity, sexual orientation, disability, and socio-economic background.

These amendments came into force for accounting periods beginning on or after 1 April 2022 and the first annual reports including disclosures subject to this rule were published from April 2023. They were intended to increase transparency with better, more comparable information on the diversity of companies’ boards and executive management, which in turn provide improved data for companies and investors to assess progress in this area, and inform shareholder engagement and investment decisions, thereby enhancing market integrity and promoting greater diversity and inclusion.

The FCA has proposed to carry over key “comply or explain” annual disclosure requirements relating to diversity of boards for the commercial companies category as part of the impending Listing Rules reforms. As such, we do not foresee there being significant changes to the diversity-related disclosure requirements in the near-term.

Disclosure Requirements

Under the Listing Rules, London Stock Exchange-listed companies are expected to comply with certain disclosure requirements which include:

Compliance Statement: Listed companies must provide a statement in their annual financial report on a “comply or explain” basis disclosing whether they have met certain targets on board diversity of female and minority ethnic representation on their board. They are also expected to provide clear and meaningful explanations as to why any of such targets have not been met.

Numerical data on Ethnic Background and Gender Identity or Sex of Board and Executive Management: Each listed company must also disclose in its annual financial report numerical data on the ethnic background and gender identity or sex of the individuals on the company’s board and executive management team, which should be set out in a format containing the information prescribed by the FCA. They must also provide an explanation of their approach to collecting the data used for the purposes of making the relevant diversity-related disclosures.

In May 2024, the FCA also proposed to make a change to the Other Ethnic Group category in its board diversity rules to align it with the Office of National Statistics Other Ethnic Group category description and allow individuals to use the Other Ethnic Group category to identify themselves within a broad range of groups, including religious groups. The FCA has confirmed that it aims to make this change in the summer alongside the wider Listing Rules reforms.

Scope of Diversity Policy: The scope of the Disclosure Guidance and Transparency Rules has also been extended to include disclosure requirements a listed company’s diversity policy is applied to its remuneration, audit and nominations committees, which must cover aspects such as ethnicity, sexual orientation, disability and socio-economic background (in addition to the aspects of age, gender or educational and professional backgrounds). If the company does not apply a diversity policy, the corporate governance statement must contain an explanation as to why this is the case.

Non-Compliance

As part of its supervisory work, the FCA conducts periodic reviews of annual financial reports to determine whether listed companies are meeting their disclosure requirements under the Listing Rules. If a listed company fails to disclose diversity-related information or fails to provide a clear explanation in its annual financial report as to why it has failed to comply with such requirements, the FCA may ask the company to take corrective action as soon as possible.

Any non-compliance will be viewed seriously and could lead to action using the FCA’s full suite of punitive powers.

In addition to considering any non-compliance, the FCA will consider disclosures identified as containing potentially false or misleading information, including the omission of material facts, likely to cause investor harm or which may breach other relevant FCA rules for ESG matters.

The FCA has suggested that it aims to identify areas of concern and disseminate examples of good practice through its periodic review work. Over time, it will also assess how far its regulatory intervention has resulted in a material improvement in both the completeness of diversity-related reporting and whether the targets have been met or exceeded. The FCA intends to conduct a review in 2025 to assess the impact of its rules on promoting transparency on key diversity metrics and supporting market integrity to see if there is evidence to support enhancing the rules.

If you have any questions or would like more information or advice on compliance with the diversity-related disclosure requirements for listed companies, please get in touch with Corporate Partner Robert Bines-Black, who also chairs Memery Crystal’s LGBTQ+ Committee or Corporate Associate Darryl Chew.