Environmental, social and governance (ESG) issues – and especially climate change – have moved into the mainstream, with rising scrutiny from investors, regulators, and wider society demanding consideration, meaningful action and transparent reporting from companies.
Politicians, regulators and investors are becoming increasingly vocal. The Financial Reporting Council (FRC) released its thematic review on climate change in November 2020 highlighting that ‘all parties’ need to do more. Investors, such as BlackRock, M&G and Schroders, are becoming more vocal in their demands on companies and in their calls for greater transparency.
of strategic report pages are taken up with ESG matters on average
of companies reported against aspects of the TCFD framework, or indicated they would do so in the future
of companies made some sort of carbon reduction commitment
of reports explicitly integrate ESG matters into their corporate strategy
A range of new reporting requirements in this area have been introduced into UK annual reports in recent years. These include Streamlined Energy and Carbon Reporting (SECR) and section 172 of the Companies Act, under which directors have a duty to act with regard to the company’s impact on the environment, as well as the Non-Financial Information Statement.
Adding to this is the new FCA requirement for premium listed companies to report on a ‘comply-or-explain’ basis against the Taskforce for Climate-related Financial Disclosures (TCFD) framework for periods beginning on, or after, 1 January 2021. Alongside these, there has been a rise in sustainability reporting under a number of influential frameworks including the GRI and SASB.
This creates some particular challenges for UK companies working towards integrating relevant ESG matters into their core commercial strategy.
Most are still in the relatively early stages, generating questions and criticism from regulators, shareholders and other stakeholders around whether the right information is being included, in the right way. The introduction of the TCFD into the UK reporting framework through the Listing Rules has added further complexity.
Through our ongoing review of FTSE 350 annual reports in the 2020-21 reporting season we have explored how these trends are playing out. In this snapshot, based on a review of the first 112 FTSE 350 annual reports, we have identified a series of emerging trends and consistent challenges, made a number of recommendations for improved disclosures, and used examples to highlight principles of good reporting.
Perhaps most importantly, we end by focusing on the potential impacts of these ‘non-financial’ issues, and climate change in particular, on the financial statements and notes.