Corporate reporting – FRC publishes thematic review of climate-related financial disclosures

The Financial Reporting Council (FRC) has published a thematic review of climate-related financial disclosures by AIM and large private companies, following the introduction of the requirement to make climate-related financial disclosures (CFD) for financial years beginning on or after 6 April 2022.

The CFD requirements were introduced for large UK-incorporated companies by the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 (SI 2022/31), which amended the strategic report requirements in the Companies Act 2006 (CA 2006). They apply to companies with more than 500 employees which are either:

• listed, banking, insurance or AIM companies or
• private companies with turnover exceeding £500 million.

(For more details, see our blog post here).

The FRC’s review covers disclosures made by 20 AIM and large private companies from a range of industries and, for many of the companies, the review covered their first year of mandatory CFD reporting under the CA 2006. The FRC found that the quality of reporting varied and that areas of improvement were identified for most companies.

The FRC notes that, whilst many of the companies reviewed used the Taskforce on Climate-related Financial Disclosures (TCFD) framework to prepare the disclosures required by the CA 2006:

• none of the companies reviewed were required to report against the TCFD regime. Companies that are listed in the UK's Equity Shares (Commercial Companies) (or ESCC) category, by contrast, are required to report against both the TFCD regime on a comply or explain basis (under UK Listing Rule 6.6.6R) and the CFD requirements in the CA 2006;
• although there is significant overlap between the two regimes, the CFD requirements are not identical to the TCFD framework;
• the disclosures required by the TCFD framework are more detailed, can be made on a comply or explain basis, and can be presented outside the annual report and accounts; and
• in the case of CFD, all the disclosures required by CA 2006 should be made, unless one of the available exemptions applies, and all CFD should be presented in the annual report and accounts, not a separate sustainability or CSR type report.

In its review, the FRC found that a number of companies which used the TCFD framework for their CFD reporting did not provide some of the disclosures required by the CA 2006 regime, without clear explanation, and none of the companies expressly relied on the exemptions for disclosure available under section 414CB CA 2006.

The review contains guidance on good practice in relation to the requirements of the regime and annotated excerpts from reports reviewed. It concludes with a section setting out the FRC’s key expectations in relation to future CFD reporting.