Sustainability reporting features prominently in the FRC’s Annual Review of Corporate Reporting

In September, the Financial Reporting Council (FRC) (the independent regulator for auditors, accountants and actuaries in the UK, responsible for setting the UK's Corporate Governance and Stewardship Codes) published the 2023/24 edition of its Annual Review of Corporate Reporting (the “Review”). 

The Review serves a precautionary and preventative purpose, shedding light on common issues identified in the most recent accounting period to help companies avoid them going forwards. We’ve summarised the sustainability-related aspects of the Review below, including the FRC’s approach to climate-related disclosures and important takeaways for companies ahead of the upcoming reporting season.

The FRC’s overall approach

The FRC states that it takes a “proportionate, targeted approach” to corporate reporting reviews more generally, principally engaging with companies on a voluntary basis. The Review reveals that the FRC did not use any of its “formal” powers during the 2023/24 period. However, the FRC wrote to 115 companies requesting a response to “substantive enquiries” where it appeared to the FRC that there was, or may have been, a material breach of relevant reporting requirements.

Climate-related reporting - a top ten issue

Task Force on Climate-Related Financial Disclosures (TCFD) reporting has been an area of focus for the FRC to date, having been the subject of two of its thematic reviews (in 2022 and in 2023).

The FRC notes that it is “pleased” with the lack of major compliance issues identified in relation to TCFD reporting this year. Nevertheless, the topic of ‘TCFD and climate-related narrative reporting’ moved into the FRC’s top ten issues raised with companies in 2023/24, representing 4% of cases opened by the FRC, up from 2% in 2022/23. This reflects an increase in “substantive correspondence” relating to the TCFD, showing that some companies continue to find TCFD reporting “challenging”. The most common issue identified is the lack of clarity around statements of consistency with the TCFD framework. 

The Review also touches on mandatory Climate-related Financial Disclosures (CFD) reporting under the Companies Act 2006 which applies to accounting periods beginning on or after 6 April 2022. Whilst companies already reporting in full against the TCFD framework are likely to meet the CFD requirements, there are some differences, including the location of the required disclosures and the mandatory nature of CFD disclosures (as opposed to the comply-or-explain basis of TCFD reporting). The FRC plans to publish a separate thematic review of CFD reporting in winter 2024/25.

More generally, the Review acknowledges the challenges and complexity of the regulatory landscape, summarising that sustainability reporting is “becoming more well-established, but scope widening”. 

Important takeaways for companies

With the reporting season approaching, the Review provides three timely reminders to companies: 

Greenwashing risk

Although not going so far as labelling it as such, the Review subtly cautions against a form of greenwashing in annual reports. The FRC states that it has challenged “the level of prominence given to green initiatives in the strategic report with relatively little discussion of core activities that generated the majority of the company’s carbon emissions”. The FRC states that it will continue to monitor the extent to which material information about the effects of climate change are incorporated into financial statements, and the consistency with the degree of emphasis placed on climate-related risks and uncertainties identified in companies’ narrative reporting. Given the enhanced regulatory scrutiny of greenwashing in recent years,[1] companies may wish to take more proactive steps to mitigate greenwashing risk during reporting season.

Sometimes, less is more

The FRC emphasises that companies need to focus on disclosing only material and relevant information and ensuring that this information is not obscured. The FRC encourages more concise disclosure, stating that “quality reporting does not necessarily require a greater volume of disclosure”. However, the FRC stresses that all material and relevant information which is necessary for users’ understanding should be included, even if it is not strictly required by regulatory standards. Finding the right balance may not be easy and the approach will vary for different companies. 

Horizon scanning

The Review alludes to the shifting regulatory landscape; the FRC notes that UK companies with a material EU presence will need to consider the requirements under the Corporate Sustainability Reporting Directive, which is “causing pressure for some reporters”. The FRC also encourages companies to familiarise themselves with the International Sustainability Standards Board (ISSB) standards as the process for endorsing the ISSB standards for use in the UK is underway (see our recent blog post on the status of ISSB implementation here).

[1] See our previous blog posts on UK regulatory enforcement against perceived greenwashing e.g., ASA ban of HSBC ads and CMA investigation into the fashion industry.