UK: FRC review of climate-related financial disclosures by AIM and large private companies

The Financial Reporting Council (FRC) published a thematic review of climate-related financial disclosures (“CFD”) under the Companies Act 2006 by AIM and large private companies on 21 January 2025  (see thematic review and press release). 

This follows the first year in-scope companies and LLPs were required to report.  See “Background” section below for more information on the CFD requirements. 

FRC report: key findings 

The FRC thematic review looked at the annual accounts of 20 UK companies which had more than 500 employees and were either AIM companies or private companies with a turnover of more than £500 million. The review covered year-ends falling between August and December 2023. Companies were chosen from a variety of industries, which will be affected by climate change in different ways and extents. 

The companies were split into three categories: 

• parent companies of privately owned groups - these companies all prepared consolidated accounts;
• subsidiaries of overseas companies - most of these companies prepared intermediate level consolidated accounts and the remainder presented company-only accounts 
• AIM companies - all of which prepared consolidated accounts

Overall, the review found that, while preparers have endeavoured to meet the CFD requirements, there was inconsistent quality among the companies selected. 

The review aims to highlight key lessons for AIM and large private companies in scope of the CFD requirements. It is the first time the FRC has carried out a review of reporting by such companies.

The FRC report sets out examples of good practice and identifies areas where preparers can provide more consistent, coherent and concise disclosures. 

The following areas for improvement were identified: 

• Resilience of business model - Several companies failed to provide any analysis of the resilience of the company's business model and strategy, taking into consideration different climate-related scenarios. Others provided disclosures that were not sufficiently company specific. Some companies with operations in multiple geographical locations did not disclose whether the specified effect of the identified risks and opportunities varied for each significant geographic area.
• Climate targets and KPIs - Disclosures in relation to climate-related targets, and the assessment of progress against these targets using key performance indicators (KPIs), require improvement. Only half of the companies presented all of this information. For some companies it was unclear whether targets were in place but not disclosed, or if there were no targets to disclose. Good practice examples of greenhouse gas (“GHG”) emission reduction targets specified the base year, the scope and boundary of GHG emissions and the timescale for their achievement. The FRC expects companies to be clear about the extent and scope of any external assurance obtained (although obtaining assurance is not mandatory).
• Governance - Disclosures explaining the company’s governance arrangements in respect of climate-related risks and opportunities were provided by almost all companies, but they were sometimes unstructured and spread throughout the annual report and accounts without specific cross-references. The extent of the integration of the climate governance process with the company’s overall governance process was often unclear. This was exacerbated in cases where a separate climate committee was established but its specific role and interaction with other committees and the board was not explained.
• How risks/opportunities are identified - Information explaining the climate-related risk assessment and management process, and its integration with the overall risk management process, was generally sufficient to meet the CFD requirements in the Companies Act. However, some companies failed to explain the way in which climate-related risks and opportunities were identified. 
• Opportunities and timeframes - Most companies disclosed climate-related risks. However, opportunities were not always identified. In addition, the timeframes over which the risks and opportunities were assessed were not always described. 
• CFD and TCFD interaction - Some companies voluntarily based their disclosures on the TCFD framework. However, a number of these companies failed to present one or more of the disclosures required by CDF requirements in the Companies Act. (This is discussed in more detail below.)
• Location of disclosures - Some companies referred to climate-related information presented outside of the annual report and accounts (for example, in a separate ESG report). Presenting CFD outside the annual report and accounts does not comply with the CFD requirements in the Companies Act. 

A point worth highlighting (as this is a common misunderstanding) is that the CFD requirements are not identical to the TCFD framework. Although there is significant overlap, the disclosures required by the TCFD framework are more detailed, are provided on a comply or explain basis, and can be presented outside the annual report and accounts. In the case of CFD, all the disclosures required by the Companies Act should be provided unless one of the available exemptions applies. All CFD should be presented in the annual report and accounts (see pp.8-9 of FRC report).

The FRC did not consider, as part of this thematic review, the consistency of CFD reporting with information presented elsewhere in the financial statements, as this has been a focus of previous climate related thematic reviews. However, the FRC encourages CFD preparers to consider the messages on consistency and connectivity contained in those publications (see here and here), as they remain relevant.

In terms of length, on average approximately 25% of the strategic reports reviewed by the FRC were devoted to CFD. The FRC acknowledges that the inclusion of CFD will increase the length of the strategic report but encourages companies to improve their climate-related financial reporting by considering the 4Cs of effective communication: company specific; clear, concise and understandable; clutter free and relevant; and comparable (see p.26 of FRC report). 

Preparers should be aiming for CFD information which is fair, balanced and comprehensive. However, the FRC reminds preparers that good CFD disclosures do not have to be long or complex. Better disclosures are generally more concise and often convey information using tables or diagrams. 

FRC: key expectations 

The FRC expects companies and LLPs to consider the areas of good practice and opportunities for improvement set out in the report and to incorporate them in their future reporting, where relevant and material. 

The FRC has set out its key expectations (see p.27 of FRC report). 

Companies and LLPs should: 

• provide, in the annual report and accounts, all the disclosures required by the Companies Act - cross-referring to information presented outside the annual report and accounts does not comply with the CFD requirements in the Companies Act;
• present an entity-specific analysis of the resilience of the business model and strategy, taking into consideration different climate-related scenarios - this can be prepared on either a qualitative or quantitative basis;
• describe the targets used to manage climate-related risks and to realise climate-related opportunities, and the KPIs used to measure progress against those targets; 
• explain (where material and relevant) the financial statement effect of strategies introduced to manage climate-related risks and opportunities; and  
• ensure disclosures are clear, concise and entity-specific.

Background: TCFD-aligned climate-related financial disclosure requirements under the Companies Act 

Sections 414C, 414CA and 414CB of the Companies Act 2006 require mandatory CFD by entities with more than 500 employees that are:

• traded, banking, insurance or AIM companies; or
• private companies and LLPs with a turnover of over £500 million. 

This applies for accounting periods starting on or after 6 April 2022.  

The CFD must be included in a non-financial and sustainability information statement (“NFSIS”) in the strategic report of in-scope companies and traded or banking LLPs, and in the energy and climate report of other LLPs. 

The CFD requirements are aligned with the recommendations issued by the international Task Force on Climate-related Financial Disclosures (“TCFD”).  That means that the CFD disclosures are based on, but do not directly mirror, the TCFD recommendations. This is an important distinction which is picked up in the FRC thematic review. 

There are eight CFD disclosure requirements that fall under four thematic pillars (governance; risk management; strategy; metrics & targets). 

In particular, in-scope entities must disclose the following information to comply with the CFD requirements in the Companies Act:

1. a description of the governance arrangements of the company or LLP in relation to assessing and managing climate-related risks and opportunities; 
2. a description of how the company or LLP identifies, assesses, and manages climate related risks and opportunities; 
3. a description of how processes for identifying, assessing, and managing climate-related risks are integrated into the overall risk management process in the company or LLP; 
4. a description of: (i) the principal climate-related risks and opportunities arising in connection with the operations of the company or LLP, and (ii) the time periods by reference to which those risks and opportunities are assessed; a description of the actual and potential impacts of the principal climate-related risks and opportunities on the business model and strategy of the company or LLP;
5. description of the actual and potential impacts of the principal climate-related risks and opportunities on the business model and strategy of the company or LLP;
6. an analysis of the resilience of the business model and strategy of the company or LLP, taking into consideration of different climate-related scenarios; 
7. a description of the targets used by the company or LLPs to manage climate-related risks and to realise climate-related opportunities and of performance against those targets; and 
8. the key performance indicators used to assess progress against targets used to manage climate-related risks and realise climate-related opportunities and a description of the calculations on which those key performance indicators are based.

The purpose of the CFD is to enable a reader to understand the effect of climate-related financial risks and opportunities on the business. Disclosures should enable the reader to understand the information presented without needing to refer to other sources of information produced by the company. Disclosures should enable the reader to understand how the climate-related financial disclosures relate to the other information presented in the annual report and should not omit information which, if disclosed, would influence the decisions of investors. It is expected that investors will use this information to make buying and selling decisions but will also use the disclosures in stewardship activities.

The government has published (non-legally binding) guidance on the CFD requirements – see here.

For more information on climate disclosure requirements for UK listed companies, see our client briefing: UK corporate reporting 2024/25 - Recent developments and guidance for listed companies.