More clarity required for ESG disclosures in UK annual reports

Out-Law News | 13 Sep 2021 | 3:02 pm | 2 min. read

Companies still need to improve their level of reporting on environmental, social and governance (ESG) issues, with more clarity required in annual reports, according to the UK’s Financial Reporting Council (FRC).

The FRC reviewed how companies and limited liability partnerships (LLPs) were reporting emissions, energy consumption and related matters under the new Streamlined Energy and Carbon Reporting (SECR) rules, which came into effect on 1 April 2019.

It said the reports it sampled “largely complied” with minimum statutory disclosure requirements for emissions and energy consumption. All entities were disclosing emissions, and the majority were disclosing energy use.

However, the FRC said entities needed to explain more clearly how information on emissions and energy use was calculated, which operations and emissions were included in reported numbers, and the level of third-party assurance obtained over the information.

Garbett Tom Sept_2019

Tom Proverbs-Garbett

Senior Associate

Quantitative disclosures without context or methodology are difficult to compare and contrast. The FRC is clear that companies need to do more to make non-narrative disclosures understandable and relevant

Companies should also consider how to integrate these disclosures with other narrative reporting on climate change, especially any emission-reduction targets, the FRC said.

Corporate governance expert Tom Proverbs-Garbett of Pinsent Masons, the law firm behind Out-Law, said: “As regular users of annual reports will know, quantitative disclosures without context or methodology are difficult, indeed often impossible, to compare and contrast.

“The FRC is clear that companies need to do more to make non-narrative disclosures understandable and relevant. Relatively simple additions can have significant impact; the example is given of SECR disclosures made on a group basis without stating which entities are included in the group for this purpose,” Proverbs-Garbett said.

“Consistency is similarly important: the best reports allow derivation of headline figures and ratios from underlying information also given in the report,” Proverbs-Garbett said.

The FRC said there were examples of emerging good practice, such as detail on specific pathways to achieving net zero targets and reporting in a format consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).

Proverbs-Garbett said the FRC was encouraging companies to carefully consider the integration of disclosures with narrative reporting on areas such as climate change.

“In other words, setting targets and providing measurement metrics are all well and good, but how does this fit into the issuer's wider strategic narrative, particularly related to identified risks?” Proverbs-Garbett said.

The FRC set out a list of key disclosure expectations, including the format of reporting, how to explain inconsistencies, describing due diligence carried out, and providing clear explanations to help readers and users of annual reports understand and compare major commitments.

Proverbs-Garbett said the expectations would be helpful for reporting entities.

“These expectations range from the practical and administrative to the more nuanced or subjective – acknowledging, for example, the importance of setting out methodology clearly, given the significant scope for judgement in determining boundaries for measurement,” he said.

FRC executive director of regulatory standards, Mark Babington, said companies should “carefully consider” the review’s findings in order to provide high-quality information about current emissions in the context of increasing focus on emission-reduction commitments and strategies.