On 29 July 2022, the Financial Conduct Authority published its Review of TCFD-aligned disclosures by premium listed commercial companies and the Financial Reporting Council published its report, Thematic review of TCFD disclosures.
The two financial watchdogs carried out their reviews in order to assess “how far [their] regulatory intervention has resulted in a material improvement in both the completeness of reporting and consistency with the TCFD’s recommendations, recommended disclosures and accompanying all-sector guidance…”.
The FCA and FRC each reported that premium-listed companies had made good progress in the quality of their climate-related disclosures. However, each report identified a number of weaknesses, which in-scope companies should address in their next round of annual report disclosures.
However, the FCA report also acknowledges that the TFCD (Task Force on Climate-related Financial Disclosures) recommendations are not a corporate reporting standard. It flags that—in order to deliver the consistency and comparability of corporate reporting—the FCA intends to adapt the current rules on climate-related reporting in order to help develop a common international reporting standard. This would reference the IFRS Foundation’s upcoming International Sustainability Standards Board (ISSB) standards.
The FCA report, which reiterates the requirement for premium-listed entities to make disclosures in line with the TCFD Recommendations in their annual reports and accounts, reviewed the annual reports for the year ended December 2021 of 171 companies on a ‘high level’ basis, and conducted a deep-dive review of the annual reports of 31 companies for the year ended December 2021.
Notable findings from its report include:
• Although 81% of companies noted that they had disclosed consistently with the seven key TCFD Recommendations, the FCA found several of these companies to have provided very limited detail. The FCA noted that it would consider these cases further and decide whether it will take any specific action against the companies.
• Gaps in disclosures often related to quantitative detail, for example, scenario analysis, metrics and targets.
• The level of detail and consistency in disclosures tended to correlate within sector, size and risk assessment lines.
The FCA report provides lots of practical advice to companies on how they might improve their reporting in the next reporting season, including:
• Follow the guidance set out in the TCFD Recommendations, and the other documents that companies should consider when determining whether their disclosures are consistent with the TCFD Recommendations, as set out under LR 9.8.6, including all-sector and sector-specific guidance.
• When making net zero commitments, consider the TCFD’s Guidance on Metrics, Targets and Transition Plans, and ensure disclosures are not misleading.
• Continue to deepen familiarity with the TCFD’s recommendations and further improve internal processes to ensure that you are ready to disclose effectively against the ISSB standards. (The FCA intends to adapt the current regime to align with forthcoming ISSB standards on climate-related reporting.)
• Consider the Sustainability Accounting Standards Board metrics for the relevant sector when making disclosures against the TCFD’s recommendations and when making wider sustainability-related financial disclosures on other sustainability topics.
• Refer to and apply the FRC’s examples of better practice set out in its report.
Annexes 1 and 2 of the FCA report provide a useful quick reference overview of the climate-related disclosure regime, including pointers to specific guidance provisions and publications, and an overview of the TCFD Recommendations.
The FRC’s report provides a comprehensive review of the extent and quality of climate-related disclosures contained in the December 2021 year end annual reports of 25 premium listed companies. It also provides examples of better practice to help companies improve their climate-related reporting in the next round of annual reporting.
The report found that the companies reviewed had generally ‘risen to the challenge’ and provided disclosures in line with the TCFD recommendations as required by LR 9.8.6, and that most of such companies also included reference in their financial statements to climate-related risk. This represented welcome progress as compared with the FRC’s review of 2020 annual reporting disclosures.
However, the report also noted several key areas for improvement, including:
1. Granularity and specificity: Generic or high-level information is not sufficient. The FRC expects specific and granular detail on how climate change may impact a company’s business, in terms of business type, sector and geography.
2. Balance: Provide more detail on opportunities arising out of climate change, as well as the risks, and include commentary on any links between any climate-related opportunities and any related technological dependencies.
3. Interlinkage with other narrative disclosures: Provide greater integration of TCFD disclosures with other ongoing business risks and strategy—do not approach climate change-related disclosures as a standalone or compliance exercise.
4. Materiality: Provide a sense of the materiality of the company’s TCFD disclosures, and the extent to which the level of materiality of any TCFD Recommendation, metric or guidance in the context of the company’s specific business has affected the extent to which the company’s disclosures are in line with the TCFD recommendations. This will help regulators to assess whether a company has indeed disclosed consistently with the TCFD recommendations as required by the Listing Rules (but take care not to adopt a tick-box narrative).
5. Connectivity between TCFD and financial statements disclosures: Provide clearer narrative explanations of the impact of climate-related risks on the financial statements (including as to any judgements, estimates or adjustments that have been applied to the financials).
Companies who disclose significant climate risks or net zero transition plans in their narrative reporting but who do not make clear how this is reflected in their financial statements may expect to be challenged by the FRC.
The FRC’s report also provides detailed expectations by way of commentary and annotation against the climate-related regulatory rules and frameworks.
• When preparing climate-related disclosures in line with the TCFD recommendations, make full use of the various pieces of guidance and technical notes published by the FCA and FRC, as noted in the FCA report and as set out in the links below.
• Review and, to the extent applicable, follow the FRC report’s examples of better reporting in your company’s next round of reporting on climate-related matters.
• Increase your company’s—and its internal reporting lines’—familiarity with the TCFD recommendations, and alert the same lines to the need to familiarise themselves with the upcoming ISSB standards when these are published.
• Do not forget the additional Companies Act 2006 disclosure requirements following the enactment of The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 (SI 2022/31), which implemented new requirements in relation to the non-financial and sustainability information statement contents, with effect in respect of financial years beginning on or after 6 April 2022.
Click here for the FCA’s Review of TCFD-aligned disclosures by premium listed commercial companies.
Click here for the TCFD’s Guidance on Metrics, Targets and Transition Plans.
Click here for the FCA’s Primary Market Bulletin 36.
Click here for the FCA’s Primary Market Technical Note 802.1.
Click here for a copy of the FRC’s Report: Thematic review of TCFD disclosures
This article was produced in association with White & Case UK’s Public Company Advisory team. Read their original alert here.