FRC and FCA publish reports on TCFD compliance by premium-listed companies

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03 Aug 2022

The Financial Reporting Council (FRC) and the Financial Conduct Authority (FCA) have each published reports assessing the quality of Task Force on Climate-related Financial Disclosures (TCFD) by premium-listed companies which were required for periods commencing on or after 1 January 2021. The FRC also reviewed the extent of climate-related disclosures within the financial statements and provides better practice disclosures which it encourages companies to refer to when preparing or seeking to improve their own disclosures.

Whilst acknowledging the challenges companies have had with the first year of TCFD reporting, both reports indicate that companies have improved their reporting both in terms of completeness and consistency with the TCFD framework.  The FRC also reports a ‘significant improvement’ in the reference to climate-related risks in the financial statements with 22 of the 25 companies reviewed making reference to this.  The FRC’s sample was weighted towards sectors and industries that are perceived to face greater risks concerning climate change and towards FTSE 350 companies.

However, the FRC notes several areas where companies need to improve their TCFD disclosures and financial statement reporting in relation to climate change.  These include:

  • Granularity and specificity: Providing more granular and specific information about the effect of climate change on different businesses, sectors and geographies.
  • Balance: Ensuring the discussion of climate-related risks and opportunities is balanced and linking climate-related opportunities to technological dependencies.
  • Interlinkage with other narrative disclosures: Linking climate-related disclosures to other elements of narrative reporting, for example information about the business model and strategy or risk management and governance processes.
  • Materiality: Explaining how the company has decided which climate-related information should be disclosed. The FRC expects companies to articulate clearly how they have considered materiality in the context of their TCFD disclosures when preparing the TCFD ‘statement of compliance’ and how they have taken into account the TCFD all-sector guidance and, where appropriate, the supplemental guidance for the financial sector and for non-financial groups.
  • Connectivity between TCFD and financial statements disclosures: Providing better understanding of the relationship between climate-related risks and amounts in the financial statements. and providing explanations, where necessary, to address whether:
    • the degree of emphasis placed on climate change risks and uncertainties in the narrative reporting, including TCFD disclosures, is consistent with the extent of disclosure about how those uncertainties have been reflected in judgements and estimates applied in the financial statements;
    • the relationships between assumptions and sensitivities considered in TCFD scenarios, including any Paris-aligned scenarios, and those applied in the financial statements, require further elaboration;
    • emissions reduction commitments and strategies described in the narrative have been appropriately reflected in the financial statements;
    • the scale of growth of businesses and extent of progress against climate-related opportunities referred to in the narrative reporting is appropriately reflected in the segmental disclosures;
    • discussion of matters which may have an adverse effect on asset values or useful lives in the narrative reporting is consistent with positions taken in the financial statements; and
    • the effects of different global warming scenarios, and the company’s own net zero commitments may affect the valuation of the company’s assets and liabilities.

The FCA, who performed a review of 171 premium-listed companies with a more in-depth review of 31 of those, was equally encouraged by the improvement in reporting.  However, like the FRC it did identify some companies that had indicated that they had made disclosures in line with the TCFD’s recommended disclosures when it appeared that they had not.  The most common reporting gaps were in respect of more quantitative areas such as scenario analysis and metrics and targets.  The FCA reminds companies of a number of its reporting expectations when preparing climate-related disclosures including:

  • Listed companies would ordinarily be expected to comply and therefore should provide the recommended disclosures under the ‘Governance and Risk management’ pillars as well as recommended disclosures (a) and (b) under the ‘Strategy’ pillar.
  • The need to consider the ‘Guidance for all sectors’ and the list of other documents included in the Listing Rules when determining the consistency of disclosures to the TCFD framework. The FCA suggests that companies should consider the TCFD guidance on Metrics, Targets and Transition Plans with respect to disclosures about net zero commitments.

The FCA also indicates that there is an expectation for companies to retain records to support both the statement in the annual report and the detailed assessment of the company’s disclosures against the TCFD’s Recommendations and Recommended disclosures and highlights in its report the steps companies should take to prepare for making TCFD-aligned climate-related disclosures.

Although both reviews focused on the premium listed companies that were required to provide TCFD disclosures for the first time this year, the findings will be of interest to other companies for whom climate-related disclosures will be required in future, for example those with a standard listing.  The findings on climate in financial statements are relevant for all companies.

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