In July 2021, the Financial Reporting Council (FRC) published a Statement of Intent on ESG challenges, setting out a number of issues that must be solved if we are to have a system of ESG reporting that works for corporates, investors and other stakeholders. The Statement of Intent identified a number of issues in relation to production, audit and assurance, distribution, consumption, supervision and regulation.
The FRC’s Financial Reporting Lab is expected to play a key part in the FRC's ESG work and (according to its July newsletter) will be launching an ESG data project in the autumn involving a series of deep-dives on the production and consumption of ESG information. The aim is to understand gaps in the current frameworks and propose how they might be closed. The Lab will start by looking at how companies produce and procure ESG data.
FRC Statement of Intent: key takeaways
- The FRC’s end objective is to ensure that the ESG reporting framework delivers information that is “fair, balanced, and understandable, transparent, consistent, and comparable”.
- It has also expressed support for the work being done by the International Financial Reporting Standards (IFRS) Foundation Trustees to develop a global standard for non-financial reporting and set up an International Sustainability Standards Board (ISSB). We’re expecting to see an announcement about the new ISSB at COP26 in November.
- The FRC notes that often ESG reporting in the UK is aspirational and high level (e.g. a commitment to meet a net zero target, or a commitment to invest a certain amount to meet such an objective) but that this does not provide users with information about progress, whether the entity’s strategy will deliver the commitment and whether financial statements are aligned with the commitment.
- On auditing & assurance - There can be a lack of credibility in ESG information, which entities are often keen to address by commissioning independent assurance. The FRC believes it is especially important to be clear about what is assured and what level of assurance is provided. A limited assurance opinion may well be insufficient to meet expectations. Although a reasonable assurance opinion provides a higher level of comfort that will better meet expectations, the current level of data maturity in most companies is unlikely to be sufficient to enable this to be provided and the criteria against which this would be assessed is unclear. The FRC has said it will do a survey of investors and others to understand their needs on audit and assurance. And the FRC will consider ESG-related amendments within future revisions of the auditing and assurance standards, and will issue audit and assurance guidance if needed.
- Financial statements may also not take proper account of material ESG issues affecting the company. The FRC will develop guidance for UK-GAAP reporters and engage on the development of international standards as necessary.
- ESG information is often located in separate places, reports and media at different dates and often not in an accessible or reusable format. Users can often have difficulty obtaining ESG data and where it does exist it is often based on incomplete frameworks and differing methodologies, has limited comparability, or is not timely.
- The immaturity of the data and lack of assurance can mean that it is not considered to be as reliable as financial data, which results in stakeholders finding it difficult to make effective decisions and investors finding it difficult to address their own regulatory requirements.
- There is a need to supervise whether companies, auditors and assurance providers meet relevant existing and future requirements.
- The FRC says more work needs to be done in terms of developing a “digitally enabled reporting framework” with consistent tagging of electronic reported information – i.e. if you improve the digitisation of reported ESG data, you can improve comparability and usability. This will also help ESG data/ratings providers who are having to cobble data together from various disparate sources. The EU is also working on this via its European Single Access Point (ESAP) initiative. The FRC has said it will form a working group on digital reporting and will lobby for a policy of “report once, use often”.
UK companies’ uptake of SASB reporting framework
The FRC and the Financial Reporting Lab have also looked at how companies in the UK are using the Sustainability Accounting Standards Board (SASB) framework to report on ESG issues and have published a snapshot of their findings. In 2020, the FRC encouraged companies in the UK to report on the SASB metrics most relevant for their sector (see here). This formed part of a wider FRC review on ESG reporting (see here).
The FRC and the Lab have found that SASB uptake has accelerated in the UK with around 40 of the FTSE 100 now using the framework. It also saw a diversity of sectors using the SASB framework, ranging from financials to food and beverage. And although it saw some interesting examples, it found that there is more to be done to evolve the reporting, including greater uptake by non-FTSE 100 companies.
In the longer term, we will also need to see what happens to the SASB framework once the IFRS’s new ISSB has been set up and develops a global standard for reporting on climate/sustainability/wider ESG issues.