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Key points

The Financial Reporting Council (FRC) and the Financial Conduct Authority (FCA) have each published reports on year one of mandatory TCFD climate-related financial disclosures for premium listed companies, including a number of key findings and examples of current leading practice in reporting. Between them, the reports place particular emphasis:
  • the need for the TCFD’s ‘all sector guidance’ (or ‘Annex’) to be considered when assessing consistency with the framework;
  • the expectation that every company will be able to report on seven of the TCFD’s 11 recommended disclosures; and
  • better connectivity between front and back half disclosures.
Background
The Financial Reporting Council (FRC) and the Financial Conduct Authority (FCA) have each published reports on year one of mandatory climate-related financial disclosures for premium listed companies. This In-brief sets out the key findings from these reports as well as some tips on how to get up to speed quickly with the reports in more detail.
The FRC report is based on 25 companies, focusing on “sectors exposed to climate change”, and provides a number of examples of current leading practice in reporting. The FCA report includes both an analysis of 171 companies based on the companies’ own assessment of their status against the TCFD framework and a more detailed analysis of 31 companies (not only in the more exposed sectors) in which they check whether they agree with what companies have reported.
Main messages
Both the FRC and FCA note that there has been a step-change in TCFD reporting this year so there is a positive high-level message in their findings. However both also agree that there is more to be done in year two and indicate that they will potentially be following up with companies whose reporting has given rise to particular questions. The FCA report comments that its more detailed review of 31 reports found a significantly lower level of consistency with the TCFD framework than companies’ own reporting suggested.
Between them, the reports particularly emphasise:
  • the need for companies’ to consider the TCFD’s ‘all sector guidance’ (or ‘Annex’) when assessing consistency with the framework;
  • the expectation that every company will be able to report on seven of the TCFD’s 11 recommended disclosures; and
  • the need for better connectivity between front and back half disclosures.
More on these recommendations is set out below.
It is also important, however, that companies do not treat the FRC and FCA observations (including the focus on the Annex) as a checklist of mandatory disclosures. Both the FRC and FCA continue to emphasise that the TCFD framework requires a robust assessment of risks and opportunities that forms the basis for judgements about the materiality of aspects of the framework in each company’s circumstances.
Key findings from the FRC report
The FRC highlighted five broad themes for companies to consider:
  • Materiality - Companies are expected to clearly articulate how they have considered materiality in the context of their TCFD disclosures when preparing the TCFD ‘statement of compliance’. The FRC may also challenge companies' claim of consistency with a recommended disclosure where it is not clear that the company has addressed all relevant and material elements of the recommended TCFD disclosures. This would include the all-sector guidance and, where appropriate, the supplemental guidance for the financial sector and for non-financial groups.
  • Connectivity between TCFD and financial statements disclosures - Companies are expected to consider the connectivity between TCFD disclosures and the financial statements, and to provide explanations where necessary, to address whether:
    • the degree of emphasis placed on climate change risks and uncertainties in the narrative reporting, including TCFD disclosures, is consistent with the extent of disclosure about how those uncertainties have been reflected in judgements and estimates applied in the financial statements;
    • the relationships between assumptions and sensitivities considered in TCFD scenarios, including any Paris-aligned scenarios, and those applied in the financial statements, require further elaboration;
    • emissions reduction commitments and strategies described in the narrative have been appropriately reflected in the financial statements;
    • the scale of growth of businesses and extent of progress against climate-related opportunities referred to in the narrative reporting is appropriately reflected in the segmental disclosures; and
    • discussion of matters which may have an adverse effect on asset values or useful lives in the narrative reporting is consistent with positions taken in the financial statements.
  • Granularity and specificity - Companies are expected to improve the specificity and granularity of their disclosures as their processes to manage climate-related risks and opportunities become more fully embedded into governance and management structures; the expectation being that the link to financial planning becomes clearer and more quantified.
  • Balance - Companies are expected to balance the discussion of climate-related risks and opportunities, and to consider linking the description of climate-related opportunities to any technological dependencies.
  • Links with other narrative disclosures - Companies are expected to consider the interlinkages of TCFD disclosures with other narrative disclosures in the annual report.
The FRC also provides more detailed expectations against each of the 11 recommended disclosures in Appendix 2 of their report.
Key findings from the FCA report
The FCA highlighted the points below in particular:
  • Listing Rule expectations - Every company is expected to be able to report in line with the following pillars and recommended disclosures of the TCFD framework: governance; risk management; and points a) and b) in strategy. It is not therefore appropriate to use the comply or explain option to omit any of the seven recommended disclosures that relate to these.
  • All sector guidance - Companies are expected to apply the ‘all sector guidance’ issued with the TCFD’s main report (updated in 2021 and known as ‘the Annex’) in the same way as the 11 recommended disclosures. Until now the Annex has in practice not usually been given the same status as the recommended disclosures or systematically considered, although the Listing Rules Guidance states that it should be “taken into account” in a company’s assessment of consistency with the TCFD framework.
  • Financial impact - There needs to be better ‘connectivity’ between the front and back half of the annual report, with fewer instances of significant disclosure in the front half but little or nothing in the accounts going forward.
What do I need to do?
We encourage you to read both reports and in particular the ‘What you need to do’ section of the FCA report and the ‘Executive Summary’ and Appendix 2 of the FRC report. A different perspective on many of the same points is also available in the ‘Green shoots’ publication issued by PwC earlier in 2022.
For PwC staff, click next to see further guidance on climate change for audit teams.
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