Senior stakeholders from a range of UK organisations gathered in late summer 2022 at a Financial Reporting Faculty round table on climate-related reporting. It was a chance to reflect on the outcome of the first reporting season since the Financial Conduct Authority’s (FCA) listing rules introduced a requirement for premium-listed entities to make disclosures under the Task Force on Climate-related Financial Disclosures (TCFD) framework on a comply-or-explain basis.

The discussion focused on assessments of the degree of progress in climate-related reporting in the UK, issues around the connectedness of ‘front-half’ and ‘back-half’ climate-related disclosures, implementation challenges and developing expectation gaps.

Many noted a marked improvement in climate-related reporting in the 2021/2022 reporting season – perhaps unsurprisingly given the introduction of the new listing rule. However, the maturity of the reporting process and the disclosures varied significantly between companies, with plenty of progress still to be made.

Round-table participants expressed mixed views about the appropriateness of coverage of climate in the annual report. As part of a faculty review of 35 FTSE 350 annual reports, it was observed that 51% of the sampled reports identified climate change as (or part of) a principal risk in 2020. This increased significantly to 74% the following year. These results suggest that climate-related matters are being increasingly recognised – but why?

Some suggested that where the new TCFD comply-or-explain listing requirements apply, boards and senior management are now compelled to consider climate matters more carefully than ever before. There is also an ever-increasing awareness of investor demand and expectation in this area, which could be leading companies to respond by reporting climate change as a principal risk where previously they had not. Perhaps the rising frequency and impact of extreme weather events has influenced the increased recognition of climate-related matters.  Nevertheless, more consistency needs to be applied to using a materiality lens when producing climate disclosures.

Some pointed to a ‘speak first, act later’ mentality. In many situations, the strategy element of decision-making within companies comes first, without a full plan of action to back it up. Many of the transition plans to which major companies are beginning to commit are therefore still rather aspirational. Often, they have yet to be built into internal budgeting processes and sometimes they are made ahead of an assessment of what is actually possible. This can, at times, make statements around climate change and climate risks in the front half of the annual report feel somewhat empty or overstated.

By contrast, others pointed to a reluctance among those outside of the more obviously affected sectors (such as transportation, and oil and gas) to accept that their businesses might be affected. A commonly held view among participants was that all companies are exposed in some way to climate-related risks, be this directly or indirectly, and that those concluding that their business is largely unaffected ought to reconsider. Have these businesses performed a full and thorough analysis of their value chain before reaching the conclusion of ‘no impact’? The risk assessment process may simply be at a relatively immature stage for some, which leads to climate-related risks being understated.

The pendulum may be swinging between too much and not enough disclosure of climate-related matters in the narrative section of annual reports, but the story is not quite the same when it comes to the financial statements.

As part of the faculty’s review of annual reports, it was observed that 46% of 2021 reports made reference to ‘climate’ in the financial statements, compared with 26% in the prior year – a marked increase. However, of the 26 companies that identified climate change as a principal risk in 2021, 12 of these (46%) made no further mention of it in the financial statements at all. This statistic alone suggests an imbalance whereby the degree of emphasis placed on climate-related risks in the front half of the annual report is not always consistent with the extent of climate-related impacts disclosed in the financial statements.

But why is this the case? Round-table participants had plenty of observations to make. First, that tendency for companies to set out their intentions before embedding them into their operational plans. It will take time for companies to work through this process and so it is understandable – although not ideal – for those that are at an earlier stage of climate reporting to paint a slightly imbalanced picture.

Challenge from audit committees, where they exist, is not always as robust or informed as it could be. Companies need to better communicate ways in which audit committees have challenged assumptions and estimates embedded in the financial statements that may be affected by climate.

It’s important to recall, when evaluating the narrative disclosures in the front half, that the time horizons discussed are often much longer than those considered by accounting standards. Forecasts and budgets used by management to produce cash flow projections for impairment reviews usually cover a period of five years or less. It might be difficult to connect these cash flow projections with plans and scenarios described in a company’s front half that look ahead considerably further, although climate risks should be appropriately factored into any long-term growth rates used.

There are elements of other accounting standards affecting the degree to which certain climate-related commitments are reflected in the financial statements. In this context, participants pointed to paragraph 112 of IAS 1 Presentation of Financial Statements, which requires reporters to provide relevant information not specifically required by IFRS Accounting Standards.

In practice, many companies still lack robust climate-related data to underpin reporting, both internally and externally. Climate-related data collection processes are still in their infancy and the associated difficulties are abundant. Challenges identified include difficulties obtaining data from suppliers, risks of errors within the data collected and the sheer volume of data required.

Additionally – and critically – there is still a real lack of experience and education, particularly within finance teams that are less likely than, for example, sustainability teams to have been part of the same learning journey when it comes to climate reporting. Considering climate as part of the well-trodden path of financial reporting, and applying the rigour associated with the financial reporting process, is something that finance teams are more than capable of once they are given the right resources and guidance to do so.

Scenario analysis is one element of the TCFD recommendations that is not well understood. Boards and audit committees need to prioritise investing time to understand this complex area of climate-related reporting.

The most recent reporting season has undoubtedly produced a positive step change in climate-related reporting – for UK premium-listed entities at least. Accepting that most are not at the end of the journey towards high-quality climate-related reporting, yet are still striving to achieve it, is important.

In an ever-evolving sustainability reporting landscape, companies must continue to strive for better, with the support and encouragement of investors, auditors and regulators.

For the full climate round-table report, head to icaew.com/improvingcorporatereporting

2017

• TCFD framework published
• Voluntary adoption

2021 year-ends

• FCA requires TCFD disclosures on comply-or-explain basis
• Premium listed entities only 

2022 year-ends

• FCA requires TCFD disclosures on comply-or-explain basis
• Expanded to standard listed entities 

2023 year-ends

• BEIS TCFD-aligned mandatory regulations come into force for April 2023 year-ends onwards
• Wider scope of entity including certain AIM-listed and large private companies

2024 onwards

• IFRS Sustainability Disclosure Standards (as issued by the ISSB) requirements likely to be adopted
• Scope of UK entities subject to mandatory reporting may increase