FCA and FRC review TCFD disclosures by premium listed companies

On 29 July 2022, the FCA published its review of TCFD disclosures by premium listed companies. This consists of a quantitative analysis of the disclosures of those premium listed commercial companies with December 2021 year ends that had published their annual financial report by the end of April 2022; and a qualitative analysis of the consistency of disclosures with the TCFD framework for a sample of those companies.

On the same date, the FRC published a review of TCFD disclosures and climate of 25 larger premium listed companies (FRC Review). The FRC Review also provides examples of better practice to help companies develop and improve their disclosures.

These reports have found that premium listed companies have made significant steps forward in the quality of climate-related information provided in their financial reports, but that further improvements are needed.

FCA’s key observations

Quantitative review of compliance

• Over 90% of companies self-reported that they had made disclosures consistent with the TCFD’s Governance and Risk Management pillars, but this dropped to below 90% for the Strategy and Metrics and Targets pillars.
• 81% of companies indicated that they had made disclosures consistent with all seven recommended disclosures which the FCA would ordinarily expect a company to comply with.
• In some instances where companies indicated that they had made disclosures consistent with the recommended disclosures, the disclosures themselves appeared to be very limited in content. The FCA note that they are considering these and may take action as appropriate.

Analysis by TCFD pillar

• The number of companies making disclosures that were either partially or mostly consistent with the TCFD framework increased significantly compared with 2020
• The most common reporting gaps were in respect of the more quantitative elements of the TCFD’s recommendations e.g. scenario analysis and metrics and targets.  
• The levels of detail and consistency in companies’ disclosures were often correlated with sector, size and risk assessment (i.e. the extent to which the company had identified climate change as among its principal risks).

FCA’s expectations

The FCA sets out the following expectations which apply to both premium and standard listed issuers:

• a listed company should ordinarily comply with the recommended disclosures under the Governance and Risk Management pillars, as well as recommended disclosures a) and b) under the Strategy pillar when complying with the guidance in LR 9.8.6E G (1) and G (2)
• issuers should consider the guidance in LR9.8.6BG and the list of documents set out in LR9.8.6CG when making their disclosures
• if companies are making disclosures about net zero commitments, they are encouraged to consider the TCFD’s guidance on Metrics, Targets and Transition Plans, and to ensure that any disclosures are not misleading
• the FCA is proposing to adapt its regime to reference the proposed International Sustainability Standards Board (ISSB) standards and strongly encourages issuers to further improve their internal processes so that they are ready to disclose effectively against those ISSB standards once finalised and adopted in the UK
• issuers should consider the Sustainability Accounting Standards Board (SASB) metrics for their sector when making disclosures against the TCFD’s recommendations, and the SASB metrics for other sustainability topics when making wider sustainability-related financial disclosures; and
• issuers are encouraged to refer to the examples of better practice included in the FRC Review.

Steps to take

The FCA has also set out the steps that it expects companies to have taken when preparing to make these disclosures, which are listed as:

1. review your governance arrangements

2. refresh your corporate strategy to incorporate climate change

3. know your compliance framework – existing and new rules

4. assess your existing public narrative and financial reporting of climate matters

5. identify physical and transition risks and opportunities and their impact

6. adapt your corporate wide (ERM) risk management processes

7. assess your company against various climate scenarios

8. identify relevant metrics and targets

9. set up compliance review and assurance processes

10. focus on training and capabilities at all levels of your company

11. engage with your investors to understand their disclosure expectations.