Essential Corporate News – Week ending 28 July 2023

FRC: CRR Thematic review of climate-related metrics and targets

On 26 July 2023, the Financial Reporting Council (FRC) published the results of a thematic review undertaken by its Corporate Reporting Review (CRR) team into the Task Force on Climate-Related Financial Disclosures (TCFD) metrics and targets disclosures of twenty UK premium and standard listed companies.

Those twenty companies operate in four sectors covered by TCFD sector-specific supplemental guidance included in the TCFD Implementing the Recommendations of the Task Force on Climate-Related Financial Disclosures document (the ‘TCFD Annex’). These sectors are Materials and Buildings, Banks, Energy and Asset Managers. Four of the companies reported against the TCFD recommendations for the first time, with the others providing a second year of mandated TCFD reporting.

The report follows on from a July 2022 thematic review, carried out in collaboration with the Financial Conduct Authority (FCA), which covered the first year of mandatory TCFD reporting by premium listed companies. That highlighted that, whilst UK premium listed companies had made a significant effort, there was room for improvement in their TCFD disclosures, especially in relation to metrics and targets and the disclosure of the effect of climate change on their financial statements.

The thematic review considered four overarching questions:

Has companies’ climate-related metrics and targets reporting improved since last year?

While there has been some improvement, the main areas where the FRC see room for further improvement overall are:

• 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;
• transparency about internal carbon prices, where used by companies to incentivise emission reduction; and
• better linkage between climate-related targets reported in TCFD disclosures and ESG targets disclosed in the Directors’ Remuneration Report.

Are companies adequately disclosing their plans for transition to a lower carbon economy, including interim milestones and progress?

Most companies have set net zero or other climate-related targets, but the metrics used to track progress were sometimes unclear and explanations of performance were not always provided. Similarly, most have set interim emissions targets, but it was not always clear whether these targets cover all business activities or how the company plans to meet them. Better practice examples included in the report outline expected steps to meet their targets, highlighting areas of judgement and uncertainties such as reliance on technological advances, or the commercialisation of early-stage technology.

Few companies currently publish and refer to separate transition plans, although many mention aspects of a transition plan (for example, forward-looking emissions projections). The FRC encourage companies to review the Transition Plan Taskforce (TPT) guidance and consider how best to articulate their targets and plans for transition, pending further developments from the TPT, government, and the FCA.

Are companies using consistent and comparable metrics?

The CRR’s sector-based approach assessed the extent of comparability between companies in the same sector. Some commonality was identified but methodological differences due to company-specific adjustments made direct comparisons challenging. As a result, the FRC encourage the use of TCFD cross-sector and industry-specific metrics to aid comparability.

Are companies explaining how their targets have affected the financial statements?

The report notes that it was often difficult to determine the extent to which the impact of targets on the financial statements had been considered, due to lack of company-specific disclosures. Most companies provided some explanation of how they considered climate in the financial statements, but fewer included disclosures explaining how the impact of announced climate-related targets and transition plans had been considered. Better practice examples cited the assumptions made in respect of useful economic lives and the potential impact on key asset balances. When there is a reasonable expectation that companies’ climate-related targets and transition plans could impact the financial statements, the FRC expect companies to explain the assessments undertaken and any impacts on the financial statements.

Better practice disclosures are provided throughout the report to act as a reference point to help companies continue to develop their climate-related disclosures. Appendix 1 to the report summarises the regulatory landscape in this area, covering current TCFD reporting requirements and wider legislative developments. Appendix 2 to the report summarises the FRC’s expectations (with page references to relevant sections with more detail). The FRC expects companies to consider the examples provided of better disclosure and opportunities for improvement and incorporate them in their future reporting where relevant and material.