At our recent ESG reporting and assurance webinar, an audience poll revealed that 68% of respondents did not feel that they were sufficiently prepared to deal with ESG in the upcoming reporting cycle, and who can blame them? The ESG reporting landscape is complex, confusing and full of acronyms - whether it’s TCFD being made mandatory in the UK, SECR coming in, or SASB being recommended by the FRC – it’s not an easy area to navigate.
Ultimately, the “alphabet soup” of ESG reporting acronyms and frameworks exists today because different people want different things from ESG reporting and that leads to a lot of confusion for reporters. For those involved in it, the most important thing is to understand who you are reporting to and what they need to know – in other words, what is material? Some topics are material to providers of financial capital like investors or banks – those are the topics that impact your enterprise value. Other topics might be material to broader stakeholders. That’s why understanding the purpose of your reporting is so important.
What are the requirements for companies reporting in the UK?
This is the question that I get asked most. What are the mandatory requirements? My answer here is that reporting requirements don’t need to be explicitly about ESG topics to require ESG disclosure. A few of the reporting requirements that are related to ESG are:
- s172 statements are a gateway to ESG reporting because you’re analysing who your stakeholders are and how you engaged and acted on that engagement.
- The risks, KPIs and business model and strategy disclosures from the strategic report require you to discuss ESG matters, to the extent that they are material to the business.
- Mandatory Greenhouse Gas reporting has been with us for a while, and this is now extended by the Streamlined Energy and Carbon reporting or “SECR” bringing large private companies into scope this year.
- And that’s just the front half. IFRS and FRS 102 disclosures around key estimates and judgements or asset lives can be impacted by material ESG risks or opportunities.
What advice do the FRC have?
The FRC released a Thematic Review on Climate Reporting in November providing a huge amount of helpful guidance. For me, the key takeaways for reporters were to consider:
1. The impact of climate change on the company
In practice, this means that they want detail on relevant risks and how you have set your strategy to manage those risks or relevant opportunities. They want you to disclose how resilient the strategy is to different global warming scenarios and metrics sufficient to demonstrate progress against both short-term and longer-term goals. They recommend TCFD (the Taskforce for Climate Related Financial Disclosure) as a useful framework to help companies to articulate those messages most clearly, even before it is mandatory. More on this later.
2. The impact of the company on the environment
Clear reporting on key metrics (like greenhouse gas emissions) and climate-related targets (like a net zero target) is important, and you need to be specific. If you have set targets, make sure that there is evidence of a plan to achieve them that covers short, medium and long-term actions. Metrics disclosed should be accompanied by clearly defined calculation methodology.
3. Financial statements
The FRC have given notice that they will challenge businesses who discuss climate as a risk in the front-end disclosures, but do not mention it in the financial statements. It is really important to go through an exercise to understand what the principal risks and opportunities from climate change are going to be on the company, and to consider how that impacts your financial statements. That has to be a key priority as part of reporting for this year end.
What you need to know about TCFD
The disclosures that the Taskforce for Climate Related Financial Disclosures (TCFD) recommend cover four key areas: governance, strategy, risk management and metrics and targets. They are intended to provide the market with decision-useful, forward looking information about how organisations are addressing climate-related risks and opportunities. The disclosures will be mandatory across the UK economy by 2025, with listed companies expected to be required to disclose for years beginning on/after 1 January 2021. And it’s not a simple exercise to create your disclosures. Our recent global report, Towards Net Zero, covers everything you need to know about TCFD reporting, including some practical steps you can follow. A challenging part of complying with the recommendations is undertaking scenario analysis to test the resilience of the business to different climate scenarios. Its important to start as early as you can with this. Many companies will not be ready to comply fully this year, but can still disclose their proposed path to compliance.
What about SASB?
ESG reporting is not just about climate. The FRC recently recommend that UK public interest entities report against the Sustainability Accounting Standards Board disclosures (SASB). These are sector specific disclosures covering financially material aspects of ESG to help companies to report in a comparable, consistent way. The biggest challenge here is the data – do you already collect the data you need for these metrics? If you do, is it reliable enough to disclose? At our ESG reporting and assurance event, 47% reported that they find the quality of underlying ESG data the biggest challenge in meeting regulatory reporting requirements. And this data is not typically owned by the finance team - it requires input from a range of departments. Getting the right collaboration is key if you are going to be able to disclose what the FRC, investors and other stakeholders are asking for.