The prominence of sustainability and climate change matters in annual reports is rising. However only 40% of businesses state explicitly that they are integrating those factors into their core purpose and strategy, new research from Deloitte has revealed.

In Corporate Reporting Insights 2022, Deloitte notes that its analysis of 50 annual reports across the FTSE 350 highlights the need for a more holistic approach to reporting on matters related to purpose, people, planet, prosperity and assurance.

The research shows that corporates have made greater efforts to link the impact of climate-related risks to their financial statements; 78% of this year’s reports cited climate-related matters in their financial statements, compared with just 30% last year.

While just under half (42%) of the financial statements examined confirmed that there was no significant impact on the relevant companies’ current-year numbers due to climate risks, Deloitte found that many references to those impacts lacked specificity and detail, continuing an established trend.

Fresh responsibility

The latest reporting season produced the first reports filed under new FCA Listing Rules, requiring companies to state whether – and where – they have made disclosures consistent with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).

With that responsibility in play, Deloitte found that the vast majority of companies (90%) had provided a clearly identifiable statement referencing the extent to which they had made disclosures consistent with TCFD and detailing where they could be found.

A majority (82%) of the reports disclosed some or all of their businesses’ Scope 3 emissions, with a further 16% stating an intention to make those disclosures in future. Meanwhile, more than half (54%) of the reports included some, or all, of their organisation’s Scope 3 emissions in their carbon reduction targets – compared with just 30% last year.

“While Scope 3 emissions are recognised as difficult to identify and measure accurately,” Deloitte said, “they frequently represent the largest proportion of a company’s carbon footprint and are therefore of interest to investors and other stakeholders.”

Transparency and trust

A further positive development that surfaced from the research is that 90% of the reports stated their organisation’s purpose upfront: a marked shift from 41% five years ago.

In the field of HR, while 68% of the reports clearly set out the link between executive remuneration and strategy, very few (18%) rationalised a link to company purpose. All the reports acknowledged the importance of staff wellbeing, as distinct from broader health and safety concerns, rising from 96% last year – and almost two-thirds (64%) went further by clearly describing how management is assessing staff wellbeing. But while 88% of the reports described a principal wellbeing risk related to staff retention, just 38% provided a specific turnover or retention metric.

Deloitte Vice Chair and Global IFRS and Corporate Reporting Leader Veronica Poole said: “Climate and sustainability now rightly feature more prominently in boardroom agendas and are gaining ever more attention from investors. Translating commitments into action is a particular focus of COP27. Companies are recognising that transparency and accountability are essential to enhance trust. Authentic reporting is key.”

Long-term resilience

Poole noted that reporting on a broad range of sustainability issues relevant to the long-term success of the business will also help corporates to get ready for reporting under new disclosure standards that the International Sustainability Standards Board will finalise over the coming months.

However, Poole warned that transparency on the relevant actions that companies are taking – and the metrics they are using to measure the success of those actions – could be improved. “Putting people, planet and prosperity for society at the heart of a company’s purpose and strategy underpins long-term business profitability and resilience,” she added. “Transparency on how this is done enhances trust.”

ICAEW Technical Manager Laura Woods said the findings mirror research from ICAEW’s Financial Reporting Faculty, which looked at changes in climate-related disclosures in the 2021/22 reporting season compared with the previous year. 

“Like Deloitte, we also found clear signs of improvement, such as increased mentions of climate in financial statements – but round-table participants still commented on a lack of connectivity between narrative climate disclosures, financial statements and other types of narrative reporting,” Woods said.

A higher bar

Woods said that connecting climate-change matters to other business-model and strategy disclosures is likely to come under continued scrutiny – particularly in light of the new, climate-related financial disclosure regulations that will soon be impacting company reports.

As ICAEW’s round-table report points out: “There is still a real lack of experience and education, particularly within finance teams, which 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.”

For that reason, the ICAEW report adds: “There is still a long way to go, and new regulatory requirements will accelerate the pace of this change. The bar set by regulators is only likely to become higher. The market expects improvements year on year. In this ever-evolving sustainability reporting landscape, companies must strive for better, with the support of investors, auditors and regulators.”