Strategy & Operations » Financial Reporting » “Further improvement” needed under new climate disclosure rules, FRC says

“Further improvement” needed under new climate disclosure rules, FRC says

Companies have “risen to the challenge” of climate-related reporting but must “significantly improve” their narrative and financial reporting, warns UK audit watchdog

“Further improvement” needed under new climate disclosure rules, FRC says

The Financial Reporting Council (FRC) has urged companies to “significantly improve” the quality of their climate disclosures in a new report.

In a review of climate-related information provided in companies’ financial reports, the audit watchdog said that premium listed companies had “risen to the challenge” but that “further improvements are needed” in their narrative and financial statement disclosures.

“It is encouraging that many companies have stepped up their efforts in providing comprehensive and consistent disclosures on climate-related risks and opportunities, as well as the impact of climate on their financial statements, but there is still a lot of room for improvement,” Sarah Rapson, executive director of supervision at the FRC, said.

In 2021, premium listed companies were required by the Financial Conduct Authority (FCA) to include a statement in their annual financial report, setting out whether they have made disclosures consistent with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

As of April 6, 2022, the UK government has mandated companies with over 500 employees and £500m in turnover to disclose climate-related financial information, in line with the TCFD recommendations.

In its review of the FCA’s listing rules, the FRC noted a “significant step forwards” in UK-listed companies’ climate-change reporting compared to its thematic review the year before noting the challenges companies have faced around data collection, needing to establish new processes and gathering information from third parties in the company’s value chain.

The FRC highlighted six areas for companies to improve upon, including providing more granular information about the effect of climate change on different business sectors and geographies, and linking climate-related disclosures to other risk management and governance processes.

Additionally, the regulator said companies should explain how they have decided which climate-related information should be disclosed and how the effects of different global warming scenarios and their own net-zero commitments may affect the valuation of their assets and liabilities.

The FCA conducted a qualitative analysis as part of its review and found over 90% of companies self-reported they had made disclosures consistent with the TCFD’s governance and risk management pillars. However, that figure dropped below 90% for the strategy and metrics, and targets pillars.

Moreover, only 64% of annual financial report reviews included climate change as a principal risk, with a further 19% including it as an emerging risk.

“We are pleased to see improvements in the completeness and consistency of disclosures with the TCFD framework, but there is clearly more to do,” said Sacha Sadan, director of ESG at the FCA.

“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.”

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