Audit quality, corporate governance reporting and best-practice data use will all be major themes for the Financial Reporting Council (FRC) in its 2023 environmental, social and governance (ESG) work, the organisation has announced.

On 30 January, the watchdog published an update to its landmark 2021 Statement of Intent on ESG Challenges, outlining the projects it plans to undertake this year in a range of priority areas. The agenda highlights what the FRC considers to be the most pressing ESG challenges currently facing the accounting and auditing profession.

Rising expectations

Among the key challenge areas that the regulator will focus on are:

1. ESG data: Having completed an initial phase of work on this subject, the FRC will now focus on developing best-practice guidance on the distribution and consumption of ESG data. It will examine how organisations should best communicate that information to the market and how investors, regulators and other stakeholders should engage with and consume it to meet their needs.

2. Materiality: The FRC is examining how corporates develop, assess and harness materiality to see if there are any ways they could refine the underlying processes. How can companies ensure that their reporting will provide stakeholders with the most relevant and decision-useful information, rather than ever-longer reports?

3. Audit quality: Amid rising expectations of audit and assurance work on climate risks, the FRC’s programme of audit quality inspections will probe the link between ESG content in audited financial statements and climate-related disclosures elsewhere in corporate annual reports. In tandem, targeted, thematic work – including a series of ‘hot’ or ‘in-flight’ reviews – will look at how and to what extent annual reports consider ESG matters.

4. Task Force on Climate-related Financial Disclosures (TCFD): To build on existing thematic reviews of TCFD and climate reporting in the financial statements of UK-listed companies, the FRC will publish a further report on relevant metrics and targets for four key industries (as yet unspecified). The watchdog will issue the report as part of its response to the work of the Transition Plan Taskforce – launched in April last year – to develop a common framework for developing and reporting climate transition plans.

5. Corporate governance reporting: To recognise the growing importance of ESG reporting and its value to the work of company boards, the FRC will undertake a revision of the UK Corporate Governance Code.

6. Investment management: As part of its annual assessment programme for applicants and signatories to the Code, the FRC Stewardship team will continue to assess how investors integrate material ESG issues into their investment management activities.

In addition, the update links stakeholders to an array of ESG resources and publications that the FRC has issued in the time since it unveiled its initial Statement of Intent.

Ongoing challenges

In an accompanying press release, FRC Executive Director of Regulatory Standards Mark Babington signalled his delight with the update. “Since we issued [the Statement of Intent] in 2021, the FRC is proud to have produced a wide range of helpful tools, information and guidance that reflects the breadth of the FRC’s remit, as well as the fast-evolving landscape of ESG and sustainability reporting globally.”

Babington said the update “highlights the ongoing challenges and opportunities of producing ESG reporting and disclosures, and where the FRC’s focus in 2023 will continue to provide guidance and examples of best practice – both in the UK and internationally.

“Improving transparency on climate and wider ESG risks and opportunities, and related governance activities and behaviours, is a key priority for our work, benefitting all those stakeholders who demand decision-useful reporting which underpins effective decision-making in capital markets.”

So what do the FRC’s priorities reveal about the ESG challenges facing accountants and auditors – and how useful will its planned initiatives be for helping the profession to tackle those challenges?

ICAEW Technical Manager Laura Woods says: “Challenges around ESG reporting are not going away – in fact, they are continuing to evolve as our response to them improves. The FRC’s planned activities around ESG data, application of materiality and audit quality are, in my view, the three most crucial areas to advance. The FRC’s thematic reviews, reports and guidance are resources that are highly valued by accountants and auditors alike, in an area where help is needed the most.”