Good sustainability reporting can be an important part of how a business responds to ESG related risks, from threats to biodiversity and water scarcity, to greenwashing and decarbonisation. Companies can use transparency to build trust and show through year-on-year reporting how they have aligned business planning with business responsibility in relation to ESG generally, and climate change in particular.
Now in the second year of mandatory reporting under the UK Listing Rules, the Task Force on Climate Related Financial Disclosures (TCFD) framework has been both a major commitment for companies and a significant addition to UK annual reports. The primary intention of the TCFD framework is to provide investors, banks, and other financial institutions with more detailed information about the actual and potential financial impacts of climate change.
In this report, we look at how TCFD reporting has progressed in year two, based on a review of 50 of the first companies to report for December 2022. Our report provides practical recommendations on how companies can continue to improve the quality of their reporting.
It’s important that companies continue to develop their climate change reporting to realise benefits such as increased investor confidence, enhanced reputation and opportunities for growth. But it’s also important because regulators, including the FRC and the FCA, will be monitoring the situation in the light of their comments on year one. And, in some cases we think there’s a risk that some companies might find themselves unfairly accused of ‘greenwashing’ if their reporting is not sufficiently clear.
Our recommendations
In our review we found some very good reports, and there was evidence of a gradual improvement in a number of areas, when compared with our review of year one. But inevitably, there remains room for improvement. Many year two reports remain far more complex and difficult to follow than we believe they need to be. Our recommendations are as follows:
- 1. Explain why climate change is important to the company
- 2. Explain where the company is on its journey
- 3. Aim for reporting that is clear and concise
- 4. Explain the nature of the information provided
1. Explain why climate change is important to the company
It is important to highlight which aspects of climate change are considered to be most relevant to the company, and which different parts of the business are most affected. Good reporting needs to reflect the different circumstances that apply to each organisation and explain the judgements about what is important (or material) and why, and to which stakeholder group or groups.
It is usually difficult to do this without some quantification of the relevant issues, and particularly without providing some information on the actual or potential financial impacts of climate change.
26% of companies included information on the estimated quantitative financial impact of climate change in their strategic report (consistent with our finding of gradual improvement this was up from just 8% in year one).
60% of companies were unclear in their strategic report on whether the actual or potential impacts of climate change were material.
2. Explain where the company is on its journey
Reporting should explain a company’s judgements about where it is, or is not, consistent with the TCFD framework. This includes identifying inconsistencies and highlighting the steps needed to address them. It is the explanation of where a company stands that has the real information value - not simply whether full or partial consistency with the framework is claimed at a particular time.
Reporting must be in line with the technical requirements, however, including the Listing Rules. And companies should bear in mind the FCA’s view that some companies claimed consistency with the TCFD framework in year one of reporting when they should not have done.
66% of companies had claimed full consistency with the TCFD framework in our survey this year and 24% explicitly stated that they were partially consistent.
Companies should be clear about the time horizons used when discussing climate change in both the front half of the annual report and the financial statements. Formal transition plans are set to become an increasingly important part of reporting on climate change.
14% of companies set out a clear and detailed transition plan, while 38% disclosed specific targets and milestones but without a formal, detailed plan. The rest had either only a high-level plan or no plan at all.
3. Aim for reporting that is clear and concise
Reporting should not be unnecessarily lengthy or complex. The separate content that many companies include to show how consistent they are with the TCFD framework is helpful at present but should become less important as climate change becomes better integrated with other areas of reporting.
Care is needed when using separate sustainability or climate change reports. They can help to provide more detailed information without making the annual report longer, but they can also make it difficult to piece the overall story together.This can dilute the overall message.
42% of companies published a separate report, but most of these also included climate reporting in the annual report. Separate reports ranged in length from just 7 to over 100 pages.
4. Explain the nature of the information provided
The sources, systems and processes that companies use to produce climate change information are often less mature than their financial reporting equivalents. Good reporting will make it clear where this is the case and how it is being addressed - including any independent assurance procedures that have been undertaken. It can also be useful to explain why a company has chosen a particular carbon offset scheme.
62% of companies disclosed at least some categories of Scope 3 emissions.
40% of companies highlighted limitations in the climate-related data, often relating to Scope 3.
Looking ahead
Reporting against the TCFD framework remains challenging, but expectations will only continue to rise as time goes on, as systems and processes improve and more information becomes available. It will be even more important for companies to report well if they are in scope for the broader ESG reporting requirements of the ISSB and/or the EU CSRD frameworks, with their many potential data points and disclosures.
There is an opportunity here to unlock value and gain a competitive advantage by recognising that this is not only a matter of doing the right thing in society’s battle against climate change and contributing to sustainability more generally. The actions companies take and the quality of their reporting can also form a path to increased resilience and significantly enhance a company’s reputation for the future.
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