Companies’ first attempts at putting together mandatory climate-related financial disclosures (CFD) have resulted in inconsistent quality, information gaps and an absence of scenario analysis, FRC analysis has found.

The regulator’s Thematic Review of Climate-related Financial Disclosures (CFD) by AIM and large private companies following the first cycle of mandatory reporting found that in many cases, companies have endeavoured to meet the requirements of the Companies Act 2006. However, the quality of CFD reporting varied, with areas for improvement identified for most companies.

In particular, the FRC acknowledged that several companies had failed to provide any scenario analysis of the resilience of the company's business model and strategy, despite it being a requirement, while others had provided disclosures that were not sufficiently company specific. 

Climate-related targets

Meanwhile, disclosures relating to climate-related targets, and progress measured against these targets using key performance indicators require improvement, the FRC said. Only half of the companies presented all of this information. For some companies it was unclear whether targets were in place but not disclosed, or if there were no targets to disclose.

Almost all companies provided disclosures explaining the company’s governance arrangements in respect of climate-related risks and opportunities, but they were sometimes unstructured and spread throughout the annual report and accounts without specific cross-references. 

On the whole, companies provided sufficient information to explain the climate-related risk assessment and management process, and how it integrated with overall risk management. However, some companies failed to explain how they had identified climate-related risks and opportunities, and while risks were disclosed by most companies, opportunities were not always included. 

Companies in scope

CFD requirements were introduced under the Companies Act 2006 for accounting periods beginning on or after 6 April 2022 and require companies to report on climate-related risks and opportunities if they have over 500 employees and are traded, banking, insurance or AIM companies; or private companies or limited liability partnerships, with turnover exceeding £500m.

The FRC said the results of the thematic review served as a reminder that good CFD disclosures do not have to be long or complex. Better disclosures were generally more concise and often conveyed information using tables or diagrams, it said. 

Sarah Rapson, the FRC’s Executive Director of Supervision, said: “As many AIM and large private companies continue to consider the impact of climate on their strategy, operations and people, the importance of robust frameworks that support preparers to assess risks and opportunities will continue to grow.

“This review provides clear examples for preparers that will enable them to meet these new Companies Act requirements. As reporting continues to mature, this review will provide a benchmark for organisations to build upon.”

Key expectations

The FRC says it expects companies and LLPs to incorporate examples of good practice and opportunities for improvement set out in this report in their future reporting. 

In particular, the review reminds preparers that disclosures should be clear, concise and entity-specific. All the disclosures required by the Companies Act should be provided in the annual report and accounts; cross-referring to information presented outside the annual report does not comply with the requirements of the Act.

Companies should describe the targets used to manage climate-related risks, and to realise climate-related opportunities, and the KPIs used to measure progress against these targets. They should also explain, where material and relevant, the financial statement effect of strategies introduced to manage climate-related risks and opportunities.

They should also present an entity-specific analysis of the resilience of the business model and strategy, taking into consideration different climate-related scenarios. This can be prepared on either a qualitative or quantitative basis.

Kate Beeston, Technical Manager, Corporate Reporting, at ICAEW, said: “Although it is clear that an improvement in the quality of disclosures is needed, it is encouraging to see the progress that has been made in climate reporting in the UK. 

“We are pleased to read that, in the first year of reporting, companies have endeavoured to meet the requirements of the Act. We encourage preparers to make use of the FRC’s thematic review, which provides useful examples of best practice and clear direction on how to improve disclosures.”