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FCA warns that UK corporate climate disclosures are lacking

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The UK’s top financial regulator, the Financial Conduct Authority (FCA) has warned that the quality of climate risk disclosure in the financial reports for the UK’s leading companies are failing to reach the required standard.

The FCA recent review of the quality of UK climate disclosures – alongside another conducted by the Financial Reporting Council (FRC) – found that  ‘significant’ improvement had been made to the quality of disclosures. However they also found remaining gaps that must be addressed if companies reporting are to be consistent with the recommendations put forth by the Task Force on Climate-related Financial Disclosures’ (TCFD).

Effectively, that means that companies are still failing to disclose how climate risk will impact them.

UK leads the way on mandatory climate disclosures

While the current reporting requirement is in line with the TCFD recommendations, the FCA has proposed Its own disclosure rules as part of the UK’s Sustainability Disclosure Requirements (SDR), a key pillar of the country’s Green Finance Strategy.

Public consultation of the proposed rules has been delayed until autumn 2022 though, in order to take into account other emerging international policy initiatives and to give stakeholders more time to prepare.

In October 2021, the UK became the first G20 country to make it mandatory for Britain’s largest businesses to disclose their climate-related risks and opportunities in line with recommendations from the Task Force on Climate-related Financial Disclosures’ (TCFD).

The FCA introduced  PS20/17, which requires relevant companies to include a statement in their Annual Financial Report (AFR) on whether they have made disclosures consistent with the Task Force on Climate-Related Financial Disclosures’ (TCFD) recommendations, or to explain why not.

April 2022 was the first time companies listed on the London Stock Exchange’s premium market were required to include climate disclosures in their annual financial reports (AFRs)

New requirements have yielded quantity over quality

The FCR review looked at the financial statements of 25 premium listed companies, while the FCA’s review considered 170 companies at a high level and 30 companies in more detail.

The sectors covered by the companies analysed were wide-ranging, with one-fifth of the coming from the industrial goods and services sector, followed by financial services (9%), real estate (8%), insurance (8%), and basic resources (8%).

Of the companies analysed by the FCA, over 90% of companies included a climate-related financial disclosure in line with TCFD in their AFRs. However, the review found that there were “instances where companies had indicated that they had made disclosures consistent with the recommended disclosures, but the disclosures themselves appeared to be very limited in content”.

Governance and risk well reported while strategy, metrics and targets lag

The reviews also found discrepancies in the seven recommended disclosures required under TCFD.  For the governance and risk pillars, over 90% of companies reported consistent disclosures with TCFD. However, for the strategy as well as metrics and targets pillars, between 11% to 24% of companies indicated that they did not include consistent disclosures.

Illuminating these discrepancies is an analysis of the companies’ net zero commitments included in their AFR. The report found that over 80% of companies included a net zero commitment in their AFR.

However, a review of the content of these commitments revealed that they “were often not clear and in some cases they risked being misleading”. The TCFD recommends that any net zero targets should be “clearly specified, understandable and contextualised”, and “inherently, and in some cases explicitly, require a plan”.

Companies still not ready for net zero

While companies may be struggling to adjust to a new regime, it is becoming apparent that few are ready for the net zero transition and evidently do not have clear plans on how to achieve that transition, let alone performance milestones enabling measurement of their progress.

FCR executive director of supervision Sarah Rapson said that it is encouraging to see a significant increase in company efforts to provide more comprehensive and consistent disclosures on climate-related risks and opportunities, but “there is still a lot of room for improvement”.

The FCA is now looking into the companies that did not appear to make a climate-disclosure statement in their AFR, as well as companies whose statements contained insufficient detail. “We may take action as appropriate” warns the FCA in the report.

Climate disclosure requirements are tightening worldwide

Many countries and regions are ramping up climate disclosure requirements in line with TCFD. The EU’s comprehensive Sustainable Finance Disclosure Regulations (SFDR) are scheduled to be implemented by January 2023. While the US’s Securities and Exchange Commission (SEC) and the Monetary Authority of Singapore (MAS) have both proposed new disclosure requirements this year.

Further voluntary global standards are also being developed under the International Sustainability Standards Board (ISSB), an initiative launched at COP26 to deliver a comprehensive global baseline of sustainability-related disclosure standards.

The UK is expected to transition from TCFD to ISSB disclosure standards once they are finalised to “[add] specificity and granularity to meet the growing and urgent demand for consistent, comparable and reliable corporate sustainability disclosures”.

With the proliferation of stricter and more standardised climate and sustainability reporting standards, the ISSB hopes to increase transparency and accuracy on how companies and investors impact the climate.

“Rarely do governments, policymakers and the private sector align behind a common cause. However, all agree on the importance of high-quality, globally comparable sustainability information for the capital markets” said ISSB chair Emmanuel Faber on the forthcoming standards.

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