ESG and Climate
Published: 25 September 2023
16 minute read
FRC Statement of Intent on Environmental, Social and Governance challenges
The FRC has published a 2023 Environmental, Social and Governance (ESG) update. This update sets out areas where there remain ongoing challenges in ESG reporting, actions to address these, and the FRC’s planned activities in this area.
Our original Statement of Intent on Environmental, Social and Governance challenges and the SASB Standards snapshot were published in 2021.
Guidance and Support for Companies
The Financial Reporting Council (FRC) has published a thematic review, assessing the quality and maturity of climate-related metrics and targets disclosures.
The review analysed TCFD disclosures from 20 companies' 2022 annual reports across four sectors: materials and buildings, energy, banks, and asset managers. It identified areas of better reporting practice as well as opportunities for improvement.
Key findings show an incremental improvement in the quality of companies' disclosure of net zero commitments and interim emissions targets. However, disclosures of concrete actions and milestones to meet targets were sometimes unclear, and comparability of metrics between companies remains challenging. Given the large volume of information presented, many companies are finding it challenging to explain their plans for transitioning to a low-carbon economy clearly and concisely.
The review also found that explanations of how climate targets affect financial statements still need improvement. Boilerplate language on climate being 'considered' provides little insight on impacts.
The Financial Reporting Council (FRC) Lab has published a new report titled “ESG Data Distribution and Consumption” examining how investors obtain and use environmental, social and governance (ESG) data on companies, and highlights what actions companies can take to facilitate this.
The report highlights an ecosystem heavily dependent on third parties for comparable ESG data, and while investors use companies' annual reports for qualitative context, most ESG metrics and data come from third-party providers who compile, standardise and derive data from company reporting. Investors occasionally use direct company data to check third-party accuracy.
Investors want companies to focus annual reports on ESG risks, opportunities and progress relevant to their business. Therefore, to not obscure relevant information, data sheets can be helpful in containing all ESG metrics in one place to facilitate third-party and investor data collection.
As investor demands for ESG data continue to grow, strong interconnectivity between narrative and data reporting is critical to avoid greenwashing and maintain credibility.
The Financial Reporting Council (FRC) has launched a public consultation on proposed revisions to the UK Corporate Governance Code. This follows the UK Government's response to the White Paper, Restoring Trust in Audit and Corporate Governance, which identified areas of reform related to a particular focus on directors' responsibilities for internal control, risk, audit and corporate reporting.
This limited revision of the Code is the first for five years and it aims to enhance the Code's effectiveness in promoting good corporate governance. There are five primary areas of focus:
- Revising those parts of the Code that deal with the need for a framework of prudent and effective controls to provide a stronger basis for reporting on and evidencing their effectiveness.
- Making necessary revisions to reflect the responsibilities of the board and audit committee for sustainability and ESG reporting and appropriate assurance in accordance with a company's audit and assurance policy.
- Amending the Code to take account of the new Audit Committee Standard (Audit Committees and the External Audit: Minimum Standard).
- Improving the functioning of comply-or-explain where reporting is currently weaker, taking account of recently published FRC research and reports.
- Updating the Code to ensure that it aligns with changes to legal and regulatory requirements as set out in the Government's response to the White Paper, including strengthening reporting on malus and clawback arrangements.
The FRC will also review the existing guidance which supports the Code: Guidance on Audit Committees, Guidance on Board effectiveness, and Guidance on risk management, internal control and related financial and business reporting. The public consultation will also be supported by a wide range of stakeholder outreach and information.
The research, conducted by Durham University and Morrow Sodali, was commissioned in early 2023 to help progress the conversation on this complex and challenging topic.
The FRC was pleased to see the number of its stakeholders who agreed to participate in this research which it believes will be a valuable tool for the various consultations underway about the impact of proxy voting agencies’ activities on corporates, particularly on key issues such as remuneration policies.
The Financial Reporting Council (FRC) has published a research report about Audit Committee Chairs’ views on, and approach to Environmental, Social and Corporate Governance (ESG) activities and reporting.
The report, commissioned by the FRC and conducted by independent research agency YouGov, involved qualitative interviews with 40 ACCs of Public Interest Entities (PIEs), representing a diverse range of organisations, including FTSE 100 and FTSE 250 companies, other listed equities, building societies, and unlisted banks.
Aimed at gaining a deeper understanding of ACCs' views and approaches towards ESG reporting and assurance, the report highlights the work that ACCs are already doing in this space, recognising the importance of ESG as an integral part of good business practice and effective stakeholder communication. The respondents noted its increased significance in recent years, triggered by the COVID-19 pandemic and heightened awareness of environmental and social issues.
ACCs showed a strong interest and understanding of ESG activities within their organisations. However, their involvement in decision-making processes, particularly related to environmental and social elements, is often limited and their primary role lies in risk management, compliance, and ensuring effective reporting.
Some interviewees also expressed concerns about the broad and evolving nature of ESG, making consistent measurement and reporting challenging across sectors and markets. They called for practical, sector-specific guidance to measure environmental and social activities and welcome best practice examples to ensure meaningful ESG reporting without excessive reporting requirements.
The Financial Reporting Council (FRC), in its role as The Secretariat to the UK Sustainability Disclosure TAC, has issued a call for evidence to inform the proposed endorsement of the IFRS Sustainability Disclosure Standards in the UK.
The International Sustainability Standards Board (ISSB) published IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures in June 2023.
This call for evidence seeks views on whether application of these standards in a UK context will result in disclosures that are understandable, relevant, reliable and comparable for investors. It also considers technical feasibility, timeliness alongside financial reporting, and proportionality of costs to benefits.
Responses are welcome from those preparing corporate disclosures, investors, and other stakeholders with an interest in sustainability reporting. Responses will inform the technical assessment for endorsing IFRS S1 and S2 in the UK.
Responses should be submitted by 11 October 2023 to [email protected].
The FRC Lab has published a report on ESG data production, designed to help companies consider how to collect and use ESG data more effectively to support better decision-making.
The FRC's ESG statement of intent published in 2021 identified that the systems producing, distributing and using ESG data are significantly less mature than those for financial information. Today’s report focuses on how companies can improve their ESG data for effective decision-making.
The report sets out the three key elements of ESG data production: motivation, method and meaning. It’s clear the current data landscape is a complex one with challenges for Boards and executives on how to identify and use the most relevant information. This report outlines some suggested positive actions to address these challenges as well as how Boards can optimise how ESG data is collected and applied.
The Financial Reporting Council (FRC) has today published a myth-buster to dispel common misconceptions about Corporate Governance and Stewardship.
The document addresses several frequently asked questions, such as:
- What is corporate governance?
- What do we mean by stewardship?
- Does the Corporate Governance code give the FRC powers to enforce against Directors?
Corporate governance and stewardship intersect in several ways. Institutional investors can play a critical role in promoting good corporate governance practices by actively engaging with companies and exercising their voting rights. This can include advocating for better environmental, social, and governance (ESG) practices, promoting transparency and accountability, and encouraging companies to consider the long-term interests of all stakeholders.
Companies that are well-governed are also generally more likely to create long-term value for shareholders, which can benefit investors in the long run. Both concepts work together to promote responsible corporate behaviour and long-term value creation.
The FRC is committed to promoting high standards of corporate governance and stewardship in the UK, and ensuring that these standards are properly understood and implemented by companies and investors alike.
To help achieve this, the FRC hopes this publication will provide greater clarity and understanding of these important topics.
The FRC has published its ‘Review of Stewardship Reporting 2022’ that found improvements across multiple areas of Stewardship reporting compared to 2021.
The review sets out key messages from the stewardship reports assessed in Spring 2022, sets out expectations for reporting in 2023, and outlines changes to the application deadlines for 2023.
This year’s review saw improvements in the quality of activity and outcome reporting for engagement, collaboration and escalation. There were also improvements in reporting on contributions made to address market-wide and systemic risks and reporting on how signatories monitor and hold service providers to account. However, there still needs to be greater emphasis placed on activities and outcomes during the reporting period, using both quantitative and qualitative evidence.
The review outlines the FRC’s key areas of focus for 2023, which includes reporting on the outcomes of engagement and providing case studies to illustrate both the activity in the year and progress towards those outcomes. To support stakeholders' continued improvement, the review also gives guidance on the reporting of exercising rights and responsibilities and monitoring and holding third-party managers to account.
The Financial Reporting Council published its Annual Review of Corporate Governance Reporting which found an improvement in the quality of reporting against the UK Corporate Governance Code.
FRC has seen year-on-year improvements in reporting, and importantly more companies are disclosing the areas within the Code that they have chosen to explain rather than comply. However, the report also found that too few companies are providing meaningful explanations.
A common theme throughout the report is the lack of disclosure in relation to the outcomes and impacts of governance policies and practices. Companies need to demonstrate, within their reporting how their governance has been improved.
The FRC was also disappointed to see minimal disclosure about board engagement with major shareholders - with some companies simply stating that there had been meetings without providing further information on their engagement and its outcome. Such explanations are important to give investors and the public information which is critical for market confidence and lowering the cost of capital.
The assessment, which comprised 100 randomly chosen FTSE 350 and Small Cap companies, supports the FRC’s growing body of evidence on those areas where companies report well and where improvements could be made. That evidence will help inform the work of the FRC as it consults on revisions to the Corporate Governance Code next year.
The FRC Lab (Lab) has published a report on disclosing net zero commitments. It provides companies with practical tips and questions to consider when communicating what their net zero commitment includes, how it may impact the strategy and business model.
To understand net zero disclosures further, the Lab spoke with investors, companies and other stakeholders to understand how investors use disclosures on net zero or other GHG reduction commitments, investor perspectives on current reporting, including good practice and areas for improvement, and reporting challenges and successes for companies with these types of commitments.
This report explores investor expectations and highlights information that would provide better and more useful disclosures on GHG emission reduction commitments. This information is likely to cover many of the current regulatory requirements for net zero reporting. This is a rapidly evolving reporting environment, both in the UK and internationally. We note that many elements highlighted in this report may already form part of some companies’ reporting requirements, for example, those who must report under TCFD or Streamlined Energy and Carbon Reporting (SECR) requirements.
The FRC Lab (Lab) has published a report on digital security risk disclosure to help companies improve the disclosure of digital security strategies, risks and governance.
With the continued digitisation of the economy, digital security risk is increasingly becoming fundamental for an investor’s understanding of a business. However, the FRC’s research showed that disclosures are not meeting investor needs effectively and companies need to improve to address this s. Companies often provide limited useful information on digital security and don’t connect to the wider strategic direction of the business or respond sufficiently to geo-political or cyber events.
Companies can improve disclosures by focusing on aspects of strategy, governance, risk and events. In addition, the Lab report provides details about how to optimise disclosure for investors. It also includes practical examples of developing practice.
The Corporate Reporting Review Team has published their Thematic Review of TCFD disclosures and climate in the financial statements.
The FRC reviewed 25 larger companies more impacted by climate change and found that companies were able to provide many of the TCFD disclosures expected by the FCA’s Listing Rule, and climate-related reporting in the financial statements, marking a significant improvement in comparison with previous years.
However, there are several areas where companies will need to raise the quality of their disclosures in future years.
- Providing more granular information about the effect of climate change on different business sectors and geographies.
- Balancing the discussion of climate-related risks and opportunities appropriately.
- Linking climate-related disclosures to other risk management and governance processes.
- Explaining how they have decided which climate-related information should be disclosed.
- Explaining more clearly how the effects of different global warming scenarios, and their own net zero commitments, may affect the valuation of their assets and liabilities.
The FRC has issued an updated edition of the Guidance on the Strategic Report to incorporate the new climate-related financial disclosures, following changes in legislation made earlier this year. In addition, a number of other amendments were also made to maintain alignment with legislation.
For entities within their scope, the new climate-related financial disclosures are effective for financial years beginning on or after 6 April 2022.
The Financial Reporting Council (FRC) has published new research, in conjunction with the UK Anti-Slavery Commissioner and Lancaster University, which has identified significant shortcomings in the quality of companies’ modern slavery reporting.
The research looked at a sample of 100 major companies’ modern slavery statements and their strategic and governance reports. One in ten companies do not provide a modern slavery statement despite it being a legal requirement. Where companies did comply, only one third of these statements were considered clear and easy to read.
The majority of modern slavery statements reviewed were fragmented, lacked a clear focus and narrative, and often contained boilerplate language. Disclosures about key performance indicators (KPIs) which measure the effectiveness of steps to minimise modern slavery risks were particularly poor. Only a quarter of companies disclosed KPI results and just 12% confirmed they have made informed decisions based on those KPIs.
The Annual Review of Corporate Governance published by the Financial Reporting Council found that there was a general improvement in reporting against the UK Corporate Governance Code. The report highlights areas of high-quality reporting, however, there is still room for further improvement in areas such as substantive disclosures on Board appointments, succession planning and diversity. The report also found that more focus on reporting the effectiveness of internal control and risk management systems would enhance the level of confidence in the company’s control framework.
There continues to be a need for greater clarity as to how a company is applying the Code’s principles as well as clearer explanations where there are departures from the Code so that shareholders and stakeholders have greater confidence of the quality of governance.
The FRC published ‘Effective Stewardship Reporting: Examples from 2021 and expectations for 2022’ which analyses reports from the first signatories to the revised Code published in September 2021.
There continues to be high quality of disclosures in the areas of governance, resourcing, and the integration of stewardship and ESG factors with investment. However, there is still room for improvement in explaining how they manage stewardship-related conflicts of interest, how managers review and assure their stewardship activities, and how they monitor and hold to account service providers operating on their behalf.
The report outlines key areas of focus for applicants to report on in the future, such as how market-wide and systemic risks are being managed, stewardship in asset classes other than listed equity, detailed reporting on the outcomes of engagement and providing case studies to illustrate both process and impact.
Scenario analysis is a vital tool for decision-makers as they assess uncertain futures and features prominently in the Taskforce on Climate-related Financial Disclosures (TCFD) Recommendations. The FRC commissioned Alliance Manchester Business School to investigate climate-related scenario analysis in more detail to assess and understand the current practice of FTSE 350 companies using scenario analysis. The research highlights the various approaches companies have adopted, instances of good practice, typical challenges faced, and the common steps taken to conduct the analysis
The FRC Lab (the Lab) has published a report in advance of these requirements to help companies prepare for mandatory TCFD reporting. It includes practical advice and examples that better address aspects of TCFD reporting from those companies already adopting the framework on a voluntary basis. Alongside the report, the Lab has also published a snapshot of the status of current reporting against the TCFD framework in the UK which highlights the increased uptake in the last year.
The Corporate Reporting Review Team’s Streamlined Energy and Carbon Reporting (SECR) Thematic Review considered how a sample of companies and Limited Liability Partnerships (LLPs) had complied with new requirements for disclosures on emissions, energy consumption and related matters which came into effect from 1 April 2019. The report set out the FRC’s findings, identified examples of emerging good practice and outlined its expectations for future reporting. The review found that while the sample of reports largely complied with the minimum statutory disclosure requirements for emissions and energy consumption, more needs to be done to make these disclosures understandable and relevant for users.
The Corporate Reporting Annual review highlights findings on climate change reporting found through the FRC’s routine reviews as well as thematic reviews such as the Streamlined Energy and Carbon Reporting Thematic. The FRC expect to see material climate change policies, risks and uncertainties discussed in narrative reporting and appropriately considered and disclosed in the financial statements, particularly where investors may reasonably expect a significant impact on the expected life or fair value of an asset or liability.
The FRC have produced a Staff Factsheet on how climate considerations should be taken into account in preparing financial statements in accordance with FRS 102. It also includes information on the relevant narrative reporting, as the two need to be considered together.
The FRC Lab (the Lab) has published its latest report on reporting on stakeholders, decisions and Section 172. The report highlights that information on stakeholders and on decisions can help investors understand how a company is progressing in fulfilling its purpose and achieving long-term success. Section 172 statements can then be a helpful bridge between the two types of information.
This report outlines what investors want to see reported in these areas and provides examples from current reporting practice that reflect possible helpful ways of addressing these needs. The report builds on the tips on Section 172 statements published in October 2020.
Alongside the report, the Lab has published a summary of the questions for companies to consider in determining what information to report on stakeholders and decisions which meets investors’ needs.
The research, Board Diversity and Effectiveness in FT350 Companies, published by the FRC in conjunction with London Business School, Leadership Institute and SQW found that the effort to diversify boards pays benefits in terms of boardroom culture and performance. To maximise these benefits boards should recognise that change takes time and that diversity without active inclusion is unlikely to encourage new talent to the board.
The main findings of the research concluded that:
- It is the responsibility of the Chair of a board to drive inclusion.
- Regulators and companies must focus on collecting more data on the types of diversity, board dynamics and social inclusion
- The Nomination Committee itself should be diverse and have a clear mandate to work with search firms that access talent from wide and diverse pools.
- The greater representation of women in the boardroom is reshaping culture and dynamics and benefiting businesses from a social justice as well as a performance perspective
The FRC’s Climate Thematic Review addresses the increasingly urgent issue of companies being held to account for the way in which they report their impact on climate. The report highlights current market practice, outlines our expectations of all reporting entities for the future, as well as investors and auditors, and where we will focus work on this key topic in the future.
Review of audit firms’ firmwide processes to support the auditor in responding to the risk of climate change
The FRC issued a letter to Head of Audit of all Tier 1, 2 and 3 firms on the finding from the review of audit firms’ firmwide processes to support the auditor in responding to the risk of climate change on 7 December 2022.
Guidance for Actuaries
The Joint Forum on Actuarial Regulation (JFAR), which is comprised of key UK actuarial regulators, has published its annual Risk Perspective to highlight JFAR’s collective view of risks to high quality actuarial work. This year’s risk perspective has identified climate-related risk (including biodiversity) and systemic risk (including Covid-19) as key risk hotspots, while long Covid, mental health and the triple lock are also included.
JFAR is comprised of representatives from the Financial Conduct Authority (FCA), the Financial Reporting Council (FRC), the Institute and Faculty of Actuaries (IFoA), the Prudential Regulation Authority (PRA) and The Pensions Regulator (TPR).
The Joint Forum on Actuarial Regulation (JFAR – which comprises of the Financial Reporting Council, the Institute and Faculty of Actuaries, the Financial Conduct Authority, the Pensions Regulator and the Prudential Regulation Authority), has approved the formation of a task force to investigate, report, and publish a deep dive on the science of climate change. This will drive greater actuarial engagement on climate change in all aspects of actuarial work. Publication is planned for the second quarter of 2022.
The FRC has published a new FRC Staff Guidance, Auditor responsibilities under ISA (UK) 720 in respect of climate related reporting by companies required by the Financial Conduct Authority. This staff guidance also includes a brief reminder of auditor’s responsibilities under ISA (UK) 720 in respect of the company’s Streamlined Energy and Carbon Reporting (‘SECR’) disclosures.
Increasingly auditors have requested guidance from the FRC, in respect of their specific responsibilities under ISA (UK) 720, following the introduction of TCFD aligned climate-related disclosure requirements for listed companies by the Financial Conduct Authority (FCA). In the FRC’s ESG Statement of Intent, published in July 2021 we stated that the FRC will monitor the need for guidance on ESG-related matters and issue audit and assurance guidance at the national level as appropriate. The guidance note is designed to address this commitment.
Responses to external consultations
The FRC has published its response to the International Sustainability Standards Board (ISSB) first two Exposure Drafts, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures.
The FRC strongly supports the development of high-quality global standards for sustainability reporting and welcomes the opportunity to provide comments on the ISSB’s first Exposure Drafts.
Further information on the FRC’s response is available:
The Financial Reporting Council (FRC) invited stakeholders to attend a webinar to learn more about the work of the newly formed International Sustainability Standards Board (ISSB) and its first two proposed standards. A recording of the webinar can be watched via the link below.