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Aug 30, 2023

Levelling up the UK market, AI and new sustainability standards

How the IR community will be impacted by major regulatory announcements this year

In the first eight months of 2023, three major pieces of regulation have been announced: the EU Artificial Intelligence (AI) Act, the International Sustainability Standards Board’s (ISSB) global sustainability reporting standards and the Financial Conduct Authority’s (FCA) listing rules reform proposal.

Any IR professional with a global reach should be aware of all three items – what they mean, how they will impact the community and how to start preparing for them.

Principles of self-discipline

AI is the buzzword IROs have been using all year, with developments in this area able to transform how IR is carried out. With so much interest in how AI – particularly generative AI – operates, regulating this space seems like the next logical step, at least for Europe. The European Parliament on June 15 approved what is set to be the first piece of regulation for AI. It looks at the impact this technology can have on businesses and the need for disclosure.

Levelling up the UK market, AI and new sustainability standards
Mark Babington, FRC

‘It’s important to have rules because what we’ve had until now was just principles of self-discipline on the part of the company that was developing [AI], and we saw that this is not enough – or, in Europe at least, we believe it’s not enough,’ explained Dragoş Tudorache, a member of the European Parliament, at Congress.

He said the regulation isn’t designed to restrict the technology itself as ‘this would have been wrong’, but instead focuses on the use of the technology. ‘Our attempt was to categorize those uses that would bring about risks to the interests we want to protect,’ he explained.

ChatIRO

AI looks set to benefit IROs, using generative AI programs such as ChatGPT to summarize large pieces of data in a matter of hours.

Gregg Lampf, vice president of investor relations at telecommunications company Ciena, says when he sends out an internal peer earnings summary report in which generative AI has been used to collate information, he will disclose this to the recipient. ‘I make sure to include a ChatGPT summary section because I think that’s appropriate,’ he says.

‘As a society, as generative AI content proliferates, I think one of the things we can consider is identifying that something is generated by AI – or the opposite, that it is a human-generated piece of content.’

Building on TCFD pillars

Sustainability has been on everyone’s mind this year, and IR professionals are no exception. With macroeconomic pressures rising, the IR community is hearing first-hand from investors about their expectations on companies to do more.

The long-awaited ISSB standards offer help in this regard. The global standards, IFRS S1 and IFRS S2, which build on the TCFD framework, set general requirements for disclosure and climate-related disclosures for businesses. They will become effective from January 2024 so businesses would collect sustainability disclosure information for the 2024 reporting cycle and publish reports in 2025.

Levelling up the UK market, AI and new sustainability standards
Naureen Zahid, OpenOcean

‘The ISSB standards just reflect the fact that there is greater ambition and greater demand for more information on climate disclosures,’ Mark Babington, executive director of regulatory standards at the Financial Reporting Council, tells IR Magazine. The purpose of the standards, he says, is to recognize the fact that there is new information related to sustainability and climate.

‘People are using the information to make capital allocation decisions, so that information needs to be as reliable and trustworthy as financial information. A lot of the proposals and a lot of the changes being made are to support the delivery of that,’ he adds.

Speaking to IR Magazine at the IFRS Foundation’s annual conference, Sue Lloyd, vice chair of the ISSB, explained how the standards are ‘bringing robust reporting that investors can rely on to understand sustainability risks and opportunities and for companies to communicate with the investor community to attract capital. And we are reminding people of that as a core message around the world.’

Much clearer rule set

The FCA listing rules reform proposal has been in the works for the past few years. Spearheaded by Brexit, the reform looks to improve the competitiveness of the UK market.

The suggested changes include replacing the existing standard and premium listing segments with a single category for equity shares in commercial companies. If applied, the listing reform would also remove shareholder votes on transactions such as acquisitions to reduce ‘friction’ for companies. 

Clare Cole, director of market oversight at the FCA, explains how the watchdog is trying to achieve a much clearer regime with the proposed changes, one that is easy to understand for both issuers and investors.

‘We’re proposing to take what is quite a complicated regime of premium and standard listings and bring that together into a single listing with a much clearer set of rules,’ she says. ‘We’ve suggested an approach to try to move away from the regime we’ve had in the past, which is very much focused on shareholder approval.’

Levelling up the UK market, AI and new sustainability standards
Clare Cole, FCA

Looking at the specifics of what the regulation will do, Cole says it will require issuers and investors to engage in ‘much more meaningful’ discussions around opportunities.

‘The use of investor shareholder approval for large transactions was a way for investors to hold issuers to account but also caused significant friction, particularly for acquisitive companies,’ she continues. ‘I think what we will encourage through this new regime is a much more in the moment dialogue to help investors hold issuers to account and [provide] better opportunities for companies to grow.’

Naureen Zahid, head of investor relations at OpenOcean, welcomes the listing rules reform, noting how it is needed for the UK to remain competitive. Allowing companies to list at an earlier stage and more easily opens up streams of capital, which would otherwise be unavailable to these companies, she explains.

‘It will provide the funding these companies need in a more democratized way, because it’ll allow different types of investors to be able to access these companies at different stages,’ she concludes.

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