Financial Report Council (FRC) scorecard on climate reporting for AIM-listed and large private companies

Let’s start with the basics. AIM-listed and private groups need to confirm whether they are required to provide a CFD disclosure within their annual report. Firms are expected to report at group-level where there are several companies within a group operating within the UK. The group is expected to evaluate its need to report against the thresholds on a consolidated basis, including overseas subsidiaries, irrespective of whether the group produced consolidated accounts.

Additionally, for large companies, unlike premium or standard listed companies, the CFD reporting requirements are a mandatory Companies Act requirement and must be included within the annual report.

In that sense each of the required disclosures must be specific addressed, and it is therefore good practice to specifically state how they are being complied with.  

The most interesting aspect of the thematic review is feedback on risk management, principal risk and opportunities, and how these impact on the resilience of the organisation’s business model. 

Reading between the lines, the regulators are discouraging an approach that sequentially complies with each disclosure in a ‘tick the box’ style. They provide several examples where a more integrated approach works better and is more helpful in telling the organisation’s story in clear and compelling way.

• They encourage a link between identification of climate-related risks and opportunities, their assessment by management and the actions proposed as a result.
• They are also seeking clarity over the potential material financial impacts on business strategy of different realistic climate scenarios. The purpose is to understand the effect on business viability and potential growth opportunities.
• They expect firms to demonstrate that they have consider how these impact change over time, considering short, medium and long-term horizons.
• Finally, they are seeking an understanding of strategic responses in terms of both mitigating key exposures and plans in place to seize commercial opportunities associated with the energy transition.

They do this by given a series of examples where firms have chosen to tabulate information or provide graphical representations that enable an understand of how each risk (or opportunity) is ranked, evaluated and acted upon including the unmitigated impact on the business, the proposed response and the anticipated outcome.

While the focus is usually given to climate-related risks, considering and including potential opportunities in the report can represent a game changer for many organisations. 

Identifying positive aspects related to climate change is undoubtedly more challenging than focusing on risks; however, this will enable better stakeholder engagement and internal buy-in, including more meaningful conversations with the board.

It is about switching the conversation from ‘how much is this going to cost’ to ‘what are the benefits of having a more sustainable organisation’, which is ultimately what will allow companies to survive in this increasingly regulated area. It is about surfing the wave rather than stay afloat.

The feedback from the regulator was that a number of firms’ disclosures were unstructured and hard to follow even for the foundational elements related to companies governance arrangements for climate risks and opportunities.

The regulator recognises that CFD disclosures typically account for over 25% of the length of firm’s strategy report within the annual report and they encourage for the disclosures to be as clear and concise as possible. There are strong hints throughout the review document that tables and diagrams should be considered wherever possible to replace the need for long narrative descriptions.

The quote “If I had more time, I would have Written a shorter letter”, often misattributed to Winston Churchill, is very apposite. It takes time to come up with a clear and concise explanation of often complex issues, so this implies a strong overarching narrative for the disclosures.

There is an expectation that greenhouse gas emissions are measured and disclosed, and for large companies this is a requirement within the Streamlined Environment and Climate Report (SECR). According the FRC, around 50% of firms met expectations, and number were not clear whether targets had been set or not.

Good practice would suggest that metrics within the SECR are consistent and aligned with targets set by the organisation. The organisation is expected to disclose any targets it has set to manage its climate-related risks and opportunities. At its most basic, this implies to reduce target for its own operational (Scope 1 and 2) emissions relative to a specific baseline year.

It is specifically expected that key performance indicators (KPIs) are used to track progress against previously set targets and that the movement of these KPIs over time are disclosed.

It is also important that boundaries for the measure of these metrics is clearly articulated, particularly in the case of groups within overseas operations.

• With any report it is always good to start with a clear understanding of the narrative thread that is being conveyed and a strategy for communicating this clearly.
• With compliance-related disclosures, this fundamental point can be lost in the need to ensure that everything is covered and nothing forgotten.
• The FRC suggests that it is often better to start with a clear story about the organisation’s approach and then check at the end that this approach meets the disclosure requirements.
• This may also be more conducive to putting commercial opportunities and energy transition-related new product innovations into context.

• As part of the preparations for the production of a firm’s next CFD disclosures, it is well worth the time to conduct a gap analysis against the good practices and areas of concern raised within the review document.
• As a matter of priority, firms should prioritise elements of their disclosures that fail to meet the FRC expectations.
• Additionally, there may be a number of opportunities for enhancement that become evident from reviewing the hints and examples provided by peer organisations. Each organisation would need to weigh the costs and benefits of adopting some of these enhancements.
• Particularly valuable are innovative approaches to better presenting information on activities the firm has already completed but has not sufficiently clearly articulated.

The board of directors is ultimately responsible for the management of climate-related risks within the organisation and these CFD disclosures. Therefore, it would be wise to inform and educate the board on the outcomes of the FRC thematic review and the implications for the organisation.

• These CFD reporting requirements may feel relatively new to many AIM-listed or large private companies but there is an expectation that they will be replaced soon as the UK formally adopts the IFRS standards in the form of UK Sustainability Reporting Standards.
• It is therefore sensible that firms ensure that their next disclosures cover the basics well, as they will soon be required to meet a higher standard of disclosure.