UK regulators find serial climate disclosure failings

A number of UK companies have failed to match their climate disclosure rhetoric to reality, according to major reviews by the Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC).

The FCA was investigating Task Force on Climate-related Financial Disclosures (TCFD) disclosures expected by its new listing rules.

The FCA reviewed 170 companies at a high level and 30 companies in detail. It also found a significant increase in the quantity and quality of climate-related disclosures.

However, it also found that some companies had said they had made disclosures consistent with TCFD recommendations, but apparently had not in reality. The FCA is considering these cases in more detail and may take action as appropriate.

While over 90% of companies self-reported that their disclosures in the Governance and Risk Management pillars were consistent with TCFD requirements, that fell to 81% when it came to meeting all seven recommended disclosures.

The quantitative elements of TCFD requirements were also particularly lacking, for example, scenario analysis, and metrics and targets.

“We are pleased to see improvements in the completeness and consistency of disclosures with the TCFD framework, but there is clearly more to do,” said Sacha Sadan, director of ESG at the FCA.

“We will continue to work with companies, their advisors and the  FRC as they further develop their disclosures. We are committed to driving higher standards in the financial industry and we also encourage companies to look ahead to the future implementation of reporting standards in development by the International Sustainability Standards Board.”

A separate report by the FRC found that companies needed to provide more granular information about the effect of climate change on different business sectors and geographies. 

It also suggested that the discussion between climate-related risks and opportunities needs to be more balanced.

The FRC found that climate-related disclosures are often not fully linked to other risk management and governance processes. More explanation was also needed around how companies decide what climate-related information should be disclosed, and how the valuation of their assets and liabilities are affected by various global warming scenarios and their own net zero commitments. 

The FRC report also outlined issues when it came to discussing the impact of climate change on the financial statements. Much of this discussion was described as “generic in nature and hence not very helpful in understanding the relationship between climate related risks and amounts in the financial statements.”