Corporate ESG Reporting: FCA and FRC reports on TCFD disclosures by companies with a UK premium listing

On 29 July, the FCA and FRC both published reports analysing the quality of mandatory TCFD climate-related financial disclosures by premium listed companies in respect of accounting periods beginning on or after 1 January 2021.

(NB. Standard listed companies are required to make such disclosures in respect of accounting periods beginning on or after 1 January 2022 and larger companies / LLPs in respect of accounting periods beginning on or after 6 April 2022.)

The FCA reviewed the disclosures of all 171 premium listed companies which had published annual reports by the end of April 2022, but looked in more detail at a sample of 31 of them. The FRC carried out a more in depth and comprehensive review of the disclosures of only 25 premium listed companies; those which are larger and more impacted by climate change.

FCA Report

The key points included the following:

• Over 90% of companies self-reported that they had made disclosures consistent with the TCFD’s Governance and Risk Management pillars, but this dropped to below 90% for the Strategy and Metrics and Targets pillars.
• 81% of companies indicated that they had made disclosures consistent with all seven recommended disclosures which the FCA would ordinarily expect a company to comply with.
• The number of companies making disclosures that were either partially or mostly consistent with the TCFD framework increased significantly compared with 2020.
• The most common reporting gaps were in respect of the more quantitative elements of the TCFD’s recommendations e.g. scenario analysis and metrics and targets.
• The level of detail and consistency in disclosures was often correlated with sector, size and risk assessment (i.e. the extent to which that company had identified climate change as among principal risks).

FRC Report

The key points included the following:

• More granular information about the effect of climate change on different business sectors and geographies needs to be provided.
• The discussion of climate-related risks and opportunities needs to be balanced appropriately.
• Climate-related disclosures need to be linked to other risk management and governance processes.
• Companies need to explain how they have decided which climate-related information to disclose.
• Companies need to explain how the valuation of their assets and liabilities is affected by different global warming scenarios (and their own net zero commitments).

Looking Ahead

The FCA stresses that companies need to be aware of “the direction of travel in corporate reporting on climate change and other sustainability matters, as set out in the Government’s Roadmap on Sustainable Investing” and that it intends to adapt its disclosure regime to “reference forthcoming International Sustainability Standards Board (ISSB) standards”.

On that basis, the FCA strongly encourages listed issuers to “continue to deepen your familiarity with the TCFD’s recommendations and further improve your internal processes to ensure that you are ready to disclose effectively against the ISSB’s standards once finalised and adopted in the UK.”

Furthermore, the FCA reiterates its “encouragement that you consider the Sustainability Accounting Standards Board (SASB) metrics for your sector when making your disclosures against the TCFD’s recommendations, and to consider the SASB metrics for other sustainability topics when making wider sustainability-related financial disclosures.”

Notably the ISSB issued exposure drafts of two proposed sustainability reporting standards in March 2022 and the expectation is that initial standards will be finalised by the end of 2022. The Government is then expected to consult in due course on a mechanism to adopt the ISSB’s standards in the UK. 

“We are pleased to see improvements in the completeness and consistency of disclosures with the TCFD framework, but there is clearly more to do. We will continue to work with companies, their advisors and the FRC as they further develop their disclosures. We are committed to driving higher standards in the financial industry and we also encourage companies to look ahead to the future implementation of reporting standards in development by the International Sustainability Standards Board" Sacha Sadan, Director of ESG at the Financial Conduct Authority

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