The thematic review considered the Task Force on Climate-related Financial Disclosures (TCFD) metrics and targets disclosures included within the 2022 annual reports of twenty UK premium and standard listed companies operating in the materials and buildings, energy, banks, and asset managers sectors.  Four of the companies reported against the TCFD recommendations for the first time, with the others providing a second year of mandated TCFD reporting.

The thematic review considered four overarching questions:

• Has companies’ climate-related metrics and targets reporting improved since last year?
• Are companies adequately disclosing their plans for transition to a lower carbon economy, including interim milestones and progress?
• Are companies using consistent and comparable metrics?
• Are companies explaining how their targets have affected the financial statements?

The thematic found that overall:

• companies’ reporting of climate-related metrics and targets has improved incrementally but that the level of maturity of disclosure varied across the four sectors. The thematic review highlights that, given the large volume of information presented, many companies are struggling to present a clear message to investors about which metrics and targets are materially important for managing climate-related risks and opportunities and their transition plans  The FRC found that it was not always easy to locate the most relevant disclosures from additional information presented, or to understand how companies had decided which information to present within the annual report and which to include elsewhere.
• There was increased transparency in companies’ statements of the extent of consistency with the TCFD framework, including clearer statements about data that is not yet available.
• Most companies have set net zero or other climate-related targets, but the metrics used to track progress were sometimes unclear and explanations of performance were not always provided. Additionally, whilst most companies had set emissions targets, it was not always clear whether these targets cover all business activities or how the company plans to meet them.
• It was often difficult to determine the extent to which the impact of targets on the financial statements had been considered, due to lack of company-specific disclosures. Most companies provided some explanation of how they considered climate in the financial statements, but fewer included disclosures explaining how the impact of announced climate-related targets and transition plans had been considered.

In addition to providing cross-sector observations, the thematic review also sets out sector-specific observations.  The thematic review contains examples of better disclosure and sets out the following areas where the FRC expects improvements in forthcoming annual reports and accounts:

• Clarity of reporting – Consider how to ensure reporting is clear and concise, using the ‘4Cs’ of effective communication (company specific; clear, concise and understandable; clutter free and relevant; and comparable) when determining the location and format of disclosures, to ensure key messages are not obscured, and use specific cross references to relevant information reported elsewhere.
• Statement of consistency - Provide a clear statement of the extent of consistency with TCFD in the annual report, including all information required by the Listing Rules.
• Data challenges - Provide clear explanations of metrics and targets reported, including, where relevant, any data limitations, methodologies, reporting boundaries and any changes to data.
• Transition plans - Consider the TCFD guidance, including relevant supplemental guidance, when reporting on targets and the plans to meet them.
• Climate-related targets:
  • Clearly explain what ‘net zero’ or ‘carbon neutrality’ terms mean, in the context of the company, ensuring that disclosures about such commitments are not misleading.
  • Provide explanations of targets, including relevant information such as the time period, reporting boundaries, the emissions scopes covered and any metrics used to measure them.
  • Explain areas of significant challenges or uncertainties, such as new technology, required to meet targets.
  • Ensure that linkages between targets are explained if a number of targets need to be met in order to achieve an overall objective.
  • Explain whether carbon offsetting represents a significant part of a company’s strategy to reach net zero.
  • Provide comparative information alongside current reporting to enable performance against the target to be assessed. If any updates are made to targets, such as restatements or updates to baselines, these should be disclosed and explained.
• Climate-related metrics:
  • Report material cross-sector climate-related metrics and keep relevant standard industry metrics and peer reporting under review.
  • Ensure that any linkage between risks and opportunities and metrics used to measure, monitor or manage them is clear, and also explain which metrics are used to track progress on net zero plans.
  • Consider whether additional disaggregation of metrics and targets by business line or geography would aid understandability.
  • Provide definitions and methodologies for company-specific metrics
  • State and explain the reporting period for the metric if different to the financial statements.
  • Report Scope 3 Green House Gas (GHG) emissions where appropriate, explaining reporting boundaries and categories reported, and consider the impact on the statement of consistency with TCFD if material categories are not reported.
  • Provide comparative data to enable trend analysis and explain material movements, particularly where performance has not met, or has exceeded targets.
  • Provide internal carbon prices where relevant and explain how they are used by the company. Where this information is presented outside of the annual report and accounts, this should be cross referenced.
• Assurance - Explain the level and scope of any external assurance given, ensuring the terminology used to describe the assurance does not imply a higher level of assurance than has actually been obtained.
• Directors’ Remuneration - Clearly describe climate-related targets and actual achievements against them as part of the Directors’ Remuneration Report, in a manner consistent with the TCFD disclosures.
• Impact of targets on the financial statements:
  • Consider the impact of climate-related targets and transition plans on the financial statements, taking into account the International Accounting Standards Board’s (IASB’s) educational material.
  • Provide an appropriate level of disclosure, including any significant judgements or assumptions that have been made in reaching their assessment, when there is a reasonable expectation that the climate-related targets and transition plans could impact the financial statements.

The thematic review also indicates that in the second year of TCFD reporting, the FRC are more likely to enter into substantive correspondence with companies who do not meet the expectations set in both its 2022 and 2023 thematic reports, especially when climate change is significant for the company, and it does not provide the TCFD recommended disclosures that are ‘particularly expected’ by the Listing Rules.  The FRC will also continue to challenge companies on the connectivity between climate-related information included in narrative reporting and financial statement disclosures.

A press release and the full thematic review are available on the FRC website.