FRC annual review of corporate reporting names climate change as key area of focus

This time last year, the FRC’s 2020 Climate Thematic review concluded that corporate reporting on climate change needed to improve to meet the expectations of investors and other users. 

Fast-forward 12 months and while the FRC in its Annual Review of Corporate Reporting this year noted that it was “pleased to see some improvements in the reporting on climate change”, it went on to say that “considerable scope for further enhancements in this area remains”. Such a finding is perhaps unsurprising given that it was only four months ago that the FRC published its Statement of Intent on ESG challenges and next steps which highlighted a number of issues to be solved with current ESG reporting. 

As Rome was not built in a day, neither are good practices in the world of climate change reporting.

FRC Annual Review: key takeaways 

• Climate reporting will be priority for the FRC’s routine monitoring in 2021/2022 as the FRC recognises “the growing importance of climate risks and the need for high quality reporting in this area”. This will be particularly relevant for those premium-listed companies now caught by the mandatory TCFD reporting requirements (see here), which the FRC have put on notice with their warning that it “will be closely reviewing how companies report against the new TCFD requirements”.
• The FRC expects companies’ climate reporting will include disclosures on material climate change policies (beyond merely stating such policies exist to also describe what the policies are) and narrative disclosures on risks and uncertainties which are reflected in financial statements, particularly where investors may reasonably expect a significant effect on the expected life or fair value of an asset or liability. This focus on alignment between the front and back end of reports means that companies can increasingly be expected to face FRC challenge if they are not considering climate change as part of their disclosures on/calculations in relation to impairment reviews, asset lives and carrying values, decommissioning and restoration provisions, contingencies and segmental reporting.
• Even as minimum legal requirements are increasing (alongside premium-listed companies, standard listed issuers along with large private companies and LLPs will also need to report based on the TCFD – see here), the FRC recognises “investors increasingly require reporting that goes beyond the statutory minimum requirements”. This aligns with the FRC’s commentary on the overall objectives of financial reporting, suggesting companies will need to ensure they go beyond such requirements in pursuit of the objective of providing investors and other users with sufficient, coherent information on climate change across their annual report and accounts so that they can properly understand the material risks and opportunities posed by climate change.

Another key area to note from the FRC’s review is its commentary on company reporting pursuant to the Streamlined Energy and Carbon Reporting regime (SECR). While the FRC noted that there was a good level of compliance with the minimum requirements, it identified a gap in terms of companies needing to make such disclosures “understandable and relevant for users”. The FRC review of SECR reporting (see here) also pushes for more detail on methodologies to calculate data (including being clearer on which entities were included within scope), better integration of SECR disclosures with narrative reporting on climate change, ensuring that appropriate intensity ratios are used and being clearer on the extent of third-party assurance. The review did however indicate that some areas of good practice had begun to be developed, including the disclosure of Scope 3 emissions and information about emissions-reduction targets and ‘net zero’ strategies.

The FRC review also comments on companies’ reporting under s.172 of the Companies Act 2006 and wider stakeholder reporting. The s.172 statement should include disclosures on stakeholder engagement, which includes consideration of the company’s operations on the environment and community, as well as disclosures on the likely long term consequences of decisions and having a reputation for high standards of business conduct. Several of these concepts overlap with climate-related reporting and so there will be a need to ensure going forward that these disclosures also cover off climate risks and opportunities.

Finally, with a proliferation of different reporting requirements on climate change, the FRC also made a number of references to cross-referencing. The point here being that while companies may be disclosing a lot of climate-related information in a variety of places, the annual report should still include sufficient levels of disclosure to meet statutory requirements and any cross-referencing should preferably be done by hyperlink to allow for ease of access to information by investors and other users.

Next steps

 All of which means that there is a lot for corporates to do on climate reporting in order to keep up with regulator, investor and other stakeholder expectations.

Companies should look to make themselves familiar with the FRC’s annual review as this contains a number of helpful indicators of where the FRC will be focusing most closely on disclosures. The FRC’s Financial Reporting Lab has also published a report with advice for premium-listed companies on how to prepare for mandatory TCFD reporting including disclosure of scenario analysis (see here).

Otherwise, companies should also be looking at materials and guidance issued by the TCFD (see here) as the UK government and regulators have made clear that this is the standard they are pushing ahead with first and foremost - at least until the development of the IFRS’ ISSB and its global sustainability disclosure standards which the government has said it intends to adopt into UK law in due course as part of the new UK Sustainability Disclosure Requirements (SDR) regime (see here).