Insights from FRC’s review of Climate-related Financial Disclosures (“CFD”) by AIM and large private companies

On 21 January, the Financial Reporting Council (“FRC”), the UK regulator for auditors and accountants, published a review of climate-related financial disclosures (“CFD”) made by AIM-listed and large private companies, as required by sections 414C, 414CA and 414CB of the Companies Act 2006 (the “Companies Act”). 

In-scope companies—which under CFD must report on climate-related risks and opportunities within a “non-financial and sustainability information statement” in the strategic report of their annual report and accounts—are those with more than 500 employees that are either (i) traded, banking, insurance or AIM companies or (ii) private companies with turnover of more than £500 million.

The CFD disclosures enumerated in s414CB of the Companies Act include items such as a description of the company’s governance arrangements in relation to assessing and managing climate-related risks and opportunities; a description of how the company identifies, assesses and manages climate-related risks and opportunities; and an analysis of the company’s business model and strategy taking into account different climate-related scenarios.

To note, the CFD requirements overlap with the recommendations of the Task Force for Climate-Related Financial Disclosures (“TCFD”) but do not mirror them; in-scope companies must therefore be careful to satisfy the specific CFD requirements. (The Financial Conduct Authority separately introduced disclosures consistent with the TCFD framework for commercial companies that have an equity listing under the UK Listing Rules.)

The FRC’s review sets out examples of good practice and identifies opportunities for improvement. In this Passle, we look at some of the insights for AIM and large private companies in scope of the CFD requirements.

• Disclosures in general — all CFD should be clear, concise, specific and well-structured.
• Location of disclosures — companies must include the CFD in their annual report and accounts and therefore not cross-refer to information outside of that.
• Parent and subsidiary disclosures — companies should identify and explain the parts of the group on which the CFD focuses.
• Governance — companies should explain the extent of the integration of the climate governance process with the company’s overall governance process, describe the roles of different committees and their interactions and consider including a supporting diagram.
• Risk management — companies should include separate, complete disclosures for each of identifying, assessing and managing climate-related risks and opportunities, and state whether climate risk management is integrated into the overall risk management process.
• Principal climate-related risks and opportunities — companies should ensure to focus on a limited number of the most significant climate-related risks and opportunities, along with their timeframes, and be mindful of the interaction between that and the separate requirement for strategic reports to disclose a description of the principal risks and uncertainties facing the company (in s414C(2)(b)).
• Business model and strategy — good disclosures here are usually in tabular format and companies should document the specific and detailed effects of each risk and opportunity on the company’s business model; additionally, companies should where appropriate refer to the effect on the company’s financial statements.
• Resilience and scenario analysis — companies must include disclosure of their actual analysis (not just that they completed an analysis) and therefore should provide such detail as how it was conducted, the scenarios used, key assumptions and the effect in each case; companies should consider using a diagram to convey the effect and likelihood of events occurring in each scenario.
• Targets and KPIs — companies should ensure to include both KPIs and targets, demonstrating the basis for calculating KPIs and how progress is measured; for greenhouse gas emissions (“GHG”) reductions targets, in particular, good practice is to specify the base year, the scope and boundary of the GHG emissions and the timescale for their achievement. 

Looking ahead, we await further announcement from the UK government on the implementation of expected UK Sustainability Reporting Standards (on which we previously wrote about), which may impact or amend the CFD required of companies.

For further guidance and tailored advice on the CFD requirements, please get in touch with your Charles Russell Speechlys contact.