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TAC Public Meeting June 2024 Paper 2B: Current reporting practice in the UK
AGENDA PAPER 2B
Executive summary
| Date | 18 June 2024 |
| Paper reference | 2024-TAC-004b |
| Project | Technical assessment of IFRS S1 and IFRS S2 |
| Topic | Current reporting practice in the UK |
| Objective of the paper | This paper outlines current corporate sustainability-related reporting practice in the UK by summarising the findings from a literature review of corporate reporting reviews conducted over the last two years. This paper provides context about corporate reporting practice in the UK to inform the TAC's technical assessment of IFRS S1 and IFRS S2. |
| Decisions for the TAC | There are no decisions required. This paper is for information only. |
| Appendices | There are no appendices to this paper. |
This paper has been prepared by the Secretariat for the UK Sustainability Disclosure Technical Advisory Committee to discuss in a public meeting. This paper does not represent the views of the TAC or any individual TAC member.
Context
1Corporate reporting of sustainability-related information is a well-established practice in the UK. The reporting regime in the UK (as described in paper reference 2024-TAC-004a) includes a number of legal and regulatory requirements for certain UK entities to disclose sustainability-related information. These reporting requirements—together with voluntary reporting—has resulted in many entities in the UK disclosing information about their sustainability-related risks and opportunities, especially with regard to climate change.
2In the technical assessment of IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-related Disclosures (IFRS S2), the TAC should be cognisant of the current reporting landscape in the UK, including current corporate reporting practice. This will also support the TAC in assessing whether:
- use of the IFRS Sustainability Disclosure Standard is likely to improve the quality of corporate reporting within the UK in the long term.
- companies are likely to be able to provide the disclosures required by the IFRS Sustainability Disclosure Standard within the timeframes that a company normally reports without undue cost or effort.
- the IFRS Sustainability Disclosure Standard is likely to be coherent with, and suitable for inclusion in, UK domestic legislation and regulation.
3To be able to assess whether these criteria are met, the TAC must first have some understanding of current reporting practice in the UK, including the type of information disclosed and the quality of the reporting.
4To understand current sustainability-related reporting practice in the UK, the Secretariat conducted a literature review of research conducted by third parties on the quantity and quality of corporate reporting in the UK. Due to the introduction of mandatory climate-related risk disclosure requirements in the UK, many of the reviews focused on the disclosure of climate-related matters rather than holistic sustainability-related disclosures. Where possible, the Secretariat has incorporated wider sustainability-related matters.
5It is important to note that most of the studies in this literature review focused on FTSE100 companies or were focused on higher risk entities (i.e., those most likely exposed to climate-related risks). Therefore, the results of this literature review do not necessarily represent the wider population of corporate reporting practice.
Analysis of corporate reporting practice in the UK
Method of the literature review
6To obtain a broad understanding of current reporting practice in the UK, the Secretariat conducted a desk-based review of the publications listed in the table below. These publications were selected as they were the most recent reviews that focused on UK reporting practice.
| Publication | Scope of entities reviewed |
|---|---|
| FCA (2022) Review of TCFD-aligned disclosures by premium listed commercial companies | High-level review of 171 premium listed commercial companies, with a more detailed analysis of 31 premium listed commercial companies |
| FRC (2023) CRR Thematic review of climate-related metrics and targets | 18 premium listed companies and 2 standard listed companies. The scope included 5 FTSE 100 companies, 7 FTSE 250 companies and 8 other listed companies. |
| FRC (2022) CRR Thematic review of TCFD disclosures and climate in the financial statements | 25 premium listed companies targeted towards higher risk companies. |
| FRC (2023) Review of Corporate Governance Reporting | A sample of 100 premium listed companies comprising of FTSE 100, FTSE 250, and Small Caps |
| FRC, Lancaster University Management School (2022) Modern Slavery Reporting Practices in the UK | A sample of 100 companies comprising of FTSE 100, FTSE 250, and Small Caps |
| PwC (2023) Still early days: A review of year two of TCFD reporting | 50 FTSE 350 companies |
| PwC (2022) Drawing a line in the sand: PwC's annual review of reporting practices in the FTSE 350 | FTSE 350 |
| Deloitte (2023) Corporate Reporting Insights 2023 | The first 50 FTSE 100 December 2022 reporters |
7Additionally, the Secretariat has conducted its own review of the FTSE 100 companies in relation to greenhouse gas emissions reporting (as of August 2023). The findings are included in the summary of findings below.
Summary of findings
8Each of the reviews listed above summarised current practice in the UK. Some of these reviews focused on the availability of information in corporate disclosure—for example, whether the company discloses information about governance arrangements—whereas other reviews also considered the quality of reporting. Therefore, the findings of this literature review alternate between the availability of information and the quality of information.
9A key finding from many of the reviews was that the quantity of reporting has increased significantly over time, due to increasing regulatory requirements and increasing demand for sustainability-related information. However, the reviews also found that whilst the quantity has increased, there are still gaps in corporate reports and a variability in the quality of reporting. In particular, the reviews found gaps in the disclosures of quantitative and forward-looking information. Information about the financial effect of climate change is an area of reporting that is still deficient with few companies providing this information.
10The following paragraphs summarise the findings by themes.
Overall TCFD disclosures
11The FRC's thematic review of TCFD disclosures found that in the first year of TCFD reporting under the FCA Listing Rule the companies in the sample were broadly able to provide the disclosures that were ‘particularly expected' by the FCA's Listing Rule in the first year. However, this review also found that there was a range of maturity in the disclosures with some gaps. This review focused on high carbon sectors, and therefore the disclosures in this sample were expected to be more developed and not necessarily representative of all TCFD disclosures.
12The FCA's high-level review of premium listed companies noted that there was a difference in compliance between the TCFD pillars (governance, strategy, risk management, metrics and targets). The review found that 90% of companies self-reported disclosures that were consistent with the governance and risk management pillars, whereas less than 90% asserted alignment with the strategy and metrics and targets pillars.
13The FCA's detailed review of premium listed companies found that most gaps in reporting were in respect of the quantitative elements of the TCFD recommendations. In particular, this review found that gaps existed in the disclosures on resilience and scenario analysis, processes for managing risks, metrics to assess climate-related risks and opportunities other than greenhouse gas emissions, and information on climate-related targets.
14The FCA's detailed review of premium listed companies also found that typically companies that had identified climate change as a principal risk had fewer gaps in reporting and were generally more consistent with the TCFD recommendations (see Figure 1).
Figure 1 Alignment of corporate reports with the TCFD recommendations. Source: FCA, Review of TCFD-aligned disclosures by premium listed commercial companies
Location of reporting
15The FCA's high-level review of premium listed companies found that 82% of companies in their sample disclosed TCFD-aligned content within the annual report, with most disclosures being located in a self-contained TCFD subsection of the strategic report. They also found that 18% of disclosures were presented outside the annual report, in either TCFD, climate or sustainability reports.
16PwC's 2023 review of TCFD reporting found that the average length of a strategic report in the sample was 85 pages, and the sustainability section had grown from 29% to 33%. In contrast, information in the strategic report about commercial strategy averaged six pages. This is consistent with the findings from PwC's 2022 review of FTSE 350 reporting practice which also noted the increasing length of strategic reports (see Figure 2) and concluded that this was due to incremental regulatory requirements—in particular those relating to sustainability. This review concluded that more sustainability-related information is being added to the reports on a yearly basis, but this information is often siloed and its strategic relevance unclear.
Figure 2 Average length of strategic reports in the UK. Source: PwC (Sept 2022) Drawing a line in the sand: PwC's annual review of reporting practices in the FTSE 350
17The FCA's high-level review of premium listed companies found that the average page length of TCFD-aligned disclosures was eight pages (in both annual reports and separate reports). This is consistent with the findings of PwC's 2023 review of TCFD reporting which found that when disclosed in the strategic report, the average length of a TCFD section was nine pages, but some sectors—in particular high-impact sectors and banking—had longer disclosures. This review also found that 42% of companies published a separate report which ranged in length from seven to 100 pages. Of the companies that had a separate report, 24% included all TCFD-aligned disclosures in this separate report, whereas 76% included information in both the annual report and separate report. The review concluded that the use of multiple reports led to considerable overlap in content.
Materiality
18PwC's 2022 review of FTSE 350 reporting practice found that 15% of companies discussed a materiality assessment and explained why a particular sustainability-related topic is included in the annual report. This review also found that just over half of the sample of companies indicated that sustainability-related matters were integral or underpinned the business strategy. Other companies either included sustainability-related strategies that were separate from the overall business strategy or did not have a clear sustainability-related strategy.
Improvements in reporting
19Three of the reviews looked at year-on-year reporting which provides information about how companies improve their reporting over time.
20PwC's 2023 review of TCFD reporting found that there were some improvements from the first year to the second year of reporting in compliance with the FCA Listing Rules. However, they also found that second year reports were more complex and difficult to understand. This review also found that many companies had used the same disclosures from the previous year which were rolled forward with minor changes.
21The FCA's high-level review of premium listed companies found that the number of companies disclosing TCFD-aligned information increased significantly between the 2020 and 2021 annual reports. The FCA's detailed review also found improvements in quantity and quality of reporting following the introduction of the climate-related reporting requirement in the FCA Listing Rule.
22The FRC's thematic review of climate-related metrics and targets found that disclosure had improved incrementally in the year between reviews. The review found that there was overall greater consideration of cross-sector and sector-specific metrics, but that there was a broad range in terms of the level of maturity in reporting.
Governance
23The FRC's 2023 review of corporate governance reporting observed that, 46% of companies had board-level committees (e.g., ESG/CSR Committees) with responsibility for assessing and considering environmental issues. This is consistent with PwC's 2023 review of FTSE 350 which found that 45% of companies had board-level responsibilities. In contrast, the Deloitte 2023 review found that 96% of the top 50 FTSE companies referred to board-level responsibilities, which suggests that larger companies are more likely to have established board-level responsibilities.
24The FCA's detailed review of premium listed companies observed gaps in governance disclosures with regard to the frequency of board engagement on climate change and the provision of information to the board. They also noted that companies did not elaborate on how the board monitors or oversees progress against targets.
Remuneration
25The FRC's 2023 review of corporate governance reporting found that an increased number of companies disclose information about sustainability-related performance targets in the executive pay, the majority of which related to employee engagement, diversity and inclusion, safety, and culture.
26Both of PwC's review on TCFD reporting and FTSE 350 reporting found that about 80% companies in their sample reported a non-financial measure—including in many cases a carbon reduction-related measure—within executive remuneration policies.
27However, FRC's 2023 thematic review of climate-related metrics and targets observed that improvement could be made in linking climate-related targets reported in TCFD disclosures and ESG targets disclosed in the Directors' Remuneration Report.
Strategy
28PwC's 2023 review of TCFD reporting found that 26% of companies in their sample included information about the estimated quantitative impact of climate change in their strategic report which was an improvement from the previous year (up from 8% the previous year). This review also found that 24% of companies clearly identified that the actual or potential impacts of climate on the company were material, whereas 16% of companies clearly identified it as immaterial. This meant that 60% of companies in the sample were unclear about whether the impact of climate change on the company was material.
Financial impacts of climate change
29PwC's 2023 review of TCFD reporting concluded that actual or potential financial impacts of climate change remain one of the most challenging aspects of climate-related reporting. This review found that 72% of companies in the sample mentioned the phrase 'climate change' in the financial statements despite 96% of companies classifying it as a principal or emerging risk in the front half of the report. Only 28% of companies provided further information beyond stating that climate change has been considered in the financial statements.
30PwC's 2022 review of FTSE 350 reporting practice found that explicit reporting of the financial impact of climate change was rare with less than 10% disclosing quantitative information about these risks. Whilst this review found that 61% of companies mentioned climate change in the financial statements, most of these disclosures were brief and only confirmed that climate change is not material.
Transition plans
31Deloitte's 2023 corporate reporting insights found that 56% of companies in their sample disclosed information about their plans to transition to a low carbon economy, with 36% providing limited disclosure and 8% providing no disclosure. This review also found that it was difficult to identify transition plan information as it was presented in different locations across the annual report or in separate reports. In particular, they found that 20% of companies in their sample provided a link from the annual report to a standalone transition plan (i.e., climate change report).
32PwC's 2023 review of TCFD reporting found that 14% of companies in their sample set out a clear and detailed transition plan. Of these companies, 40% disclosed factors outside of the company's control that are important to their transition plan (e.g., dependency on technologies that have not yet been fully developed).
Scenario analysis
33PwC's 2023 review of TCFD reporting found that 52% of companies demonstrated clearly how scenarios had been applied to the company's situation—in particular in industries that are considered higher impact. They also found that companies used a range of scenarios. On average, companies used four scenarios, but in one case a company used up to 18. In many of these cases, companies used scenario models that are freely available such as those from International Energy Agency (IEA), Intergovernmental Panel on Climate Change (IPCC) and Network for Greening the Financial System (NGFS) covering different emissions pathways including 1.5, 2, 2 to 3, and more than 4 degree scenarios.
34PwC's 2022 review of FTSE 350 reporting practice found that companies may be hesitant to disclose forward-looking information due to concerns about the accuracy of data or providing information that compromises competitive advantage.
Risk management
35The FRC's 2023 review of corporate governance reporting found that 60% (up from 41% in 2022) of companies in their sample had identified climate change as a principal risk with 17% (down from 30% in 2022) of companies identifying climate change as an emerging risk. This is consistent with PwC's 2022 review of FTSE 350 reporting practice which found that 43% of companies in their sample included climate change as a principal risk and 22% included it as an emerging risk. This is also consistent with the FCA's high-level review of premium listed companies which found that 64% of companies included climate change as a principal risk and an additional 19% included it as an emerging risk.
36Regarding the types of risk that companies had identified, PwC's 2023 review of TCFD reporting found that a range of approaches were taken by different companies. On average, companies identified 5 transition risks and 3 physical risks. However, they also found there was a wide range of the number of risks reported, with companies disclosing anywhere between 0 to 14 transition risks. This review also found that 92% of financial services companies in their sample explained how climate change impacted the existing risk profile rather than disclosing it as a separate risk. This is consistent with the findings of the FCA's high-level review of premium listed companies where three companies (although no industry was included) did not include climate change as a standalone risk but explained how climate change had been factored into existing principal risks.
Metrics
37PwC's 2023 review of TCFD reporting found that only 22% of companies in their sample had clearly linked metrics and targets to the relevant climate-related risks and opportunities. The review also found that companies in the sample provided a range of nil to 16 climate-related metrics with an average of seven metrics.
38FRC's 2023 thematic review of climate-related metrics and targets found that there was a broad range of maturity in the disclosures, and that due to the large volume of information, many companies struggled to present a clear message to investors about which metrics and targets are material. In particular, the FRC observed room for improvement on:
- the definition and reporting of company-specific metrics and targets, beyond headline ‘net zero' statements;
- better linkage between companies' climate-related metrics and targets and the risks and opportunities to which they relate;
- the explanation of year-on-year movements in metrics and performance against targets; and
- transparency about internal carbon prices, where used by companies to incentivise emissions reduction.
39FRC's 2023 thematic review of climate-related metrics and targets also found that companies disclosed a range of climate-related metrics, for example, metrics in relation to energy, waste, water, renewables, internal carbon price and air emissions.
Greenhouse Gas emissions, including Scope 3
40The FRC's 2023 review of corporate governance reporting found that most companies within the sample of 100 premium listed companies reported on Scope 1 and Scope 2 greenhouse gas emissions, with 90% providing some Scope 3 data. This is consistent with the TAC Secretariat review of FTSE 100 companies where 97 companies provided Scope 1 and Scope 2 data, with 85 companies including Scope 3 data.
41The TAC Secretariat's review of FTSE 100 greenhouse gas emissions reporting found that although most companies used the GHG Protocol Corporate Standard as a method to calculate greenhouse gas emissions, there was a lot of variation in terms of the approaches and emissions factors used to calculate the emissions. This review also found that companies used different approaches to disclose their Scope 2 emissions, with seven companies disclosing location-based only, 15 disclosing market-based only, 63 disclosing both (but in different configurations), and 12 companies not providing clear information on which approach was used.
42PwC's 2023 review of TCFD reporting found that 28% of their sample provided a comprehensive set of Scope 3 emissions data. In these reports, companies provided an explanation when a certain Scope 3 category¹ was determined as not material. In contrast, the review also found that 24% of companies did not provide any Scope 3 emissions data. The TAC Secretariat's review of FTSE 100 greenhouse gas emissions reporting observed that the companies that disclosed their Scope 3 emissions data used 55 different configurations of Scope 3 categories, with an additional 20 companies not providing information that was clear enough to determine which categories were used. Figure 3 demonstrates which Scope 3 categories were disclosed based on the TAC Secretariat's review.
Figure 3 Scope 3 emissions categories reported by FTSE 100 companies.
| Scope 3 Categories |
|---|
| Category 1–Purchased Goods and Services |
| Category 2–Capital Goods |
| Category 3–Fuel- and Energy-Related Activities Not Included in Scope 1 or Scope 2 |
| Category 4–Upstream Transportation and Distribution |
| Category 5–Waste Generated in Operations |
| Category 6–Business Travel |
| Category 7–Employee Commuting |
| Category 8–Upstream Leased Assets |
| Category 9–Downstream Transportation and Distribution |
| Category 10–Processing of Sold Products |
| Category 11–Use of Sold Products |
| Category 12–End-of-Life Treatment of Sold Products |
| Category 13–Downstream Leased Assets |
| Category 14–Franchises |
| Category 15–Investments |
43PwC's 2023 review of TCFD reporting found that 40% of companies recognised data limitations especially with Scope 3. This review noted that Scope 3 is one of the most challenging disclosure requirements due to issues in the collation of accurate, complete and timely data from value chains. The review found that 62% of companies that reported Scope 3 data did so for the same reporting period, but that meant that estimates had to be used to complete the data. Other companies used different approaches to their Scope 3 disclosures, including providing a limited reporting period (six to nine months) or providing information from the previous year.
Targets
44The FCA's high-level review of premium listed companies found that 80% of annual reports that were reviewed included net zero statements. This is consistent with PwC's 2022 review of FTSE 350 reporting practice which found 76% of companies in the sample referred to a net zero commitment with only 48% of companies having a specific key performance indicator relating to carbon reduction.
45FRC's 2023 thematic review of climate-related metrics and targets found that companies reported various targets covering both greenhouse gas emissions targets and other climate-related targets. In particular, the review found that most companies had greenhouse gas emissions reduction targets, but the clarity of the target varied. This finding is consistent with the FRC's 2023 review of corporate governance reporting, which found that the metrics used to track progress were sometimes unclear and explanations of performance were not always provided.
46Deloitte's 2023 corporate reporting insights found that 98% of companies in their sample disclosed one or more climate-related target with 88% of companies including some or all of their Scope 3 emissions in the greenhouse gas emissions targets. Additionally, this review found that 44% of companies in the sample disclosed that their targets had been verified by a third party, whereas 28% disclosed their intention to have, or were in the process of having, the targets verified by a third party or had submitted the targets for review. Specifically, the review found that in all but two cases, the third party referenced was the Science Based Target Initiative (SBTI).
47PwC's 2023 review of TCFD reporting found that 38% of companies in their sample disclosed specific climate-related targets and milestones but without a formal plan. The review also found that 68% of companies in their sample provided discussion on the progress made in the year—52% provided a high-level description whereas 16% provided a detailed description of progress.
Carbon credits
48Deloitte's 2023 corporate reporting insights found that 64% of companies in their sample planned to use carbon credits to offset greenhouse gas emissions, with just under 50% providing quantitative information (typically expressed as a percentage of the target) on the extent to which targets are dependent on the offsets. Of those that planned to used carbon credits to offset greenhouse gas emissions, this review found that 30% of disclosures had a lack of clarity around the use of carbon credits.
49FRC's 2023 thematic review of climate-related metrics and targets found that more than half of the companies in the sample referred to the potential use of carbon credits to meet greenhouse gas emissions targets. This review found that several companies explained the categories and quality of credits that would be used to meet targets, and a few companies will continue to evaluate the benefits of using some in the future.
Other sustainability-related disclosures
50Research from the FRC and Lancaster University Management School on modern slavery reporting practice found that approximately one in ten companies did not provide a modern slavery statement, and of those that did only a third were considered clear and easy to read. The research found that although 55% of companies in the sample reported that they assess modern slavery risks in their own business, the majority of modern slavery statements were backward-looking with only 28% of statements including an action plan based on the risks identified.
51The research also found that 14% of the annual reports in the sample connected the mandatory modern slavery statement with the company's Section 172 Statement—which requires directors to have regard to the interests of employees, foster appropriate relationships with suppliers, and maintain high standards of business conduct. The research concluded that the lack of connection between the annual report and modern slavery statement suggest that companies do not view human rights issues in their workforce and supply chain as a principal source of risk for their business.
52PwC's 2022 review of FTSE 350 reporting practice found that companies disclose information on other sustainability-related topics other than climate change. This includes 42% of companies referring to biodiversity (with 2% including it as an emerging risk), 21% of companies including information on social mobility, and 67% providing information about board diversity.
Conclusion and next steps
53The literature review provides context as to the current state of corporate sustainability-related reporting in the UK. In conclusion, the findings suggest that large, listed UK companies are already disclosing sustainability-related information—especially with regard to climate-related risks and opportunities—which suggests that the largest companies in the UK have a high level of preparedness for the implementation of IFRS Sustainability Disclosure Standards, and in particular IFRS S2.
54The findings from this literature review will be used in future technical papers in the assessment of the technical areas of IFRS1 and IFRS S2. When preparing the technical papers for future TAC discussions, the Secretariat will refer to this literature review and, where appropriate, will include a summary of the findings in relation to specific technical areas.
Questions for the TAC
- Does the TAC have any comments on the analysis provided in this paper?
-
According to the GHG Protocol Technical Guidance for Calculating Scope 3 Emissions there are 15 categories for the Scope 3 greenhouse gas emissions. ↩