Climate-related Financial Disclosures: How can AIM and large private companies improve reporting?

Climate-related Financial Disclosures (CFD), as required by the Companies Act 2006, applies to all traded, banking, insurance or AIM-listed companies with over 500 employees, as well as private companies, and limited liability partnerships (LLPs), with both more than 500 employees and turnover of over £500 million.

All companies in scope are required to publish a Non-Financial and Sustainability Information Statement (NFSIS), which discusses their principal climate change-related risks and opportunities, and explains how they're governed, measured, and managed. The regulator has shared their expectations of disclosures in the review. 

The 20 UK companies included in it were predominantly industrial or consumer, with the balance coming from technology, utility, and financial.

As expected, the report recognised that many companies lack experience in reporting their climate-related activities externally, but made it clear that the quality and completeness of disclosures didn't always meet the regulator’s expectations. Several companies failed to provide any analysis, with others providing disclosures that weren't sufficiently specific to them. 

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Recommendations for improving your reports 

Climate resilience and related scenario analysis of the business model and strategy

Disclosures need to provide details about the scenarios used, explain how the analysis was undertaken and key assumptions used, and specify the business model and strategy effects together with the relevant time horizons. In preparing your next report, consider the following: 

• What specific climate scenarios have been considered in your analysis, and how do these align with your business model and strategic objectives?
• Can you describe the methodology and key assumptions used in your climate scenario analysis, and how these assumptions impact your business strategy over different time horizons?
• How does your business model adapt to the potential impacts identified in your climate scenario analysis, and what measures are in place to enhance climate resilience?

Climate-related targets and KPIs demonstrating progress

Only 50% of the sample group provided this information, and for those who did, areas for improvement were identified.

In preparing your next report, consider the following:

• Have you established the base year for your targets?
• Have you defined the scope and boundary of emissions covered by the target, as well as the timeline for achievement? For example, do your emission reduction targets encompass your global footprint, or do they only relate to UK operations?

Climate-related risk assessment and management process

Some companies didn't provide an explanation of how climate-related risks and opportunities were identified.

When preparing your next report, consider the following questions:

• Who is involved in risk and opportunity identification?
• Is there a process used to identify risks and opportunities?
• How do you determine if these are significant ('principal') to the business?
• How are they monitored?
• Is this integrated into the overall risk management process?

Climate-related opportunities are less frequently identified than climate risks

Disclosures often identify climate-related risks, but opportunities are less frequently disclosed. Multi-stakeholder workshops can help uncover these opportunities for integration into plans, frameworks, and reporting.

Companies that understand and assess climate and other risks do more than just compliance. They show resilience, understand their supply chain better, and future-proof their operations, helping them stay competitive.

Three potential benefits

1. Clarifying your approach to ESG and associated risk to lenders

Businesses which can set out a clear plan for ESG benefit from better lending rates: our recent ESG lenders survey showed that could be up to 0.75 base points.

2 Opening up your supply chain

Other companies in your supply chain may also be assessing their own risks and looking to set their own ESG targets and demonstrate compliance. Providing this information to them is becoming increasingly important.

3 Improving awareness of your ESG context

Identifying trends, risks and opportunities, and measuring impacts qualitatively and quantitatively, means you can adapt your strategy as needed.

Climate risk and opportunity governance

Disclosures were sometimes unstructured and spread throughout the report without specific cross-references.

In preparing for your next report, consider the following questions:

• Are your disclosures company-specific?
• Are committee roles determined and described?
• How are the Board and committees engaged, and how do they interact with management?
• Are your governance arrangements for climate integrated with general governance arrangements of the company?

Presenting CFD information outside the annual report

The CFD information must be included in the annual report and accounts. Where sustainability and ESG reports are also prepared, there's a greater risk of the information required by the regulation not being reported in NFSIS within the strategic report.

Ahead of your next reporting cycle, it's important to liaise with your internal teams to align your ESG and sustainability communications strategy with the regulatory requirements and adjust your approach as needed.

Preparing for your next reporting season

When drafting your CFD information, it can be useful to look at the TCFD (Task Force on Climate-related Financial Disclosures) Fundamental Principles for Effective Disclosures.

The FRC report sets out their expectations of good disclosure, including examples of good practice, and areas where they found improvement is required. The contents of the report are likely to be useful in preparing your CFD disclosures for the upcoming reporting season.

For more insight and guidance, contact Laura Gardner.

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