A window of opportunity

2022/23 was a reporting season with relatively few changes in requirements for companies to deal with after the introduction (for most) of the TCFD framework on climate change last year. However, a significant wave of changes are in the pipeline for 2025/26 - including the UK implementation of the ISSB sustainability disclosure standards, a range of new statements and disclosures flowing from the Brydon and Kingman reviews (like the audit & assurance policy, resilience statement and more), and important revisions to the UK Corporate Governance Code, especially in relation to risk management and internal control.

Some might say we’re in the calm before the storm. We prefer to see it as a window of opportunity in which companies can position themselves to prepare for what lies ahead.

Against this background, what we saw in the 2022/23 reporting season was a very limited change in the approach taken by companies. Where there were changes these generally focused on building out TCFD disclosures further, sometimes in areas that were trialled in year one. Even in that area, however, we saw very few significant developments.

So we’re urging companies to make the most of the window that we’re in, which will largely remain open over the next couple of reporting seasons.

Some key areas to focus on

Limiting the length of the report

Reports have continued to grow in length. The average strategic report is now 82 pages long, up from 79 last year, with ESG content making up 35% of the average strategic report content, up from 26% last year. This in part reflects the growing focus companies have on ESG matters, although some companies were not yet in scope for TCFD reporting requirements at the time of last year’s review.

Governance reports (including remuneration) are on average 59 pages in length - up from 40 pages just five years ago underlining the increased focus on diversity, the introduction of ESG or sustainability committees and evidence of early adoption of governance regulatory changes.

With the sheer volume of new requirements on the horizon, this increase cannot continue. Now is the time to really focus on “cutting the clutter”, and weeding out the content that scarcely changes, or that could apply to virtually any organisation. Our recommendations below are aimed at supporting companies with this.

Telling the strategic story

Strategic reports continue not to be sufficiently strategic. They are potentially a unique and vital part of a UK annual report but, a decade after they were introduced, companies generally still find it difficult to provide open and transparent information about an aspect of the company that they - understandably - see as highly sensitive.

There continue to be some signs of progress, but it is slow. We saw an increase in companies linking strategic goals to their KPIs, with 60% now doing this through the use of symbols (which we see as the bare minimum approach) or a narrative description. Those linking their principal risks to strategic priorities remained consistent at 65%. This still leaves a large number of companies not even meeting such basic expectations, however.

The contrast we saw with the relatively new area of ESG reporting was striking. Across a range of different aspects of ESG, there was a clear willingness to provide information in a way that has never been applied to strategic reporting. Connections between ESG and strategy are also increasingly starting to be made: we found 43% of FTSE 350 companies now explicitly linking their core strategic priorities to ESG with a further 31% underpinning their strategy with an ESG focus.

As we already noted, with the new sustainability reporting requirements that are in the pipeline it will be vital for companies to identify the strategically significant aspects of the relevant topics and avoid loading the strategic report with even more non-strategic content.

Focusing on the future

Reporting needs to be more forward-looking. If strategic reports are to become more strategic, they will also need to provide more forward-looking information. Again, the contrast with ESG reporting was clear to us. Whilst more than 73% of companies set out targets for climate change looking out beyond 10 years, less than 10% of companies provided a quantified strategic target beyond four years - outside of any ESG elements. And more than 22% of companies still disclosed no specific forward-looking strategic targets at all.

Getting the balance right

Reporting needs to be fair, balanced and understandable. This applies across the annual report, taken as a whole, from the use of alternative performance measures to risk management and internal control. But two specific observations stood out for us from our review this year:

• A well-chosen case study can be a very strong piece of reporting - but it’s important to ensure that it relates to the strategic story and isn’t just there to showcase good news: and
• Balance is key in ESG and climate change disclosures - it can be very easy to verge on greenwashing where the significance and/or impact of a risk or opportunity is not explained well.

Summing up

Many of the points above are not new - in fact, we’ve been making some of them for many years. But there has never been a better time to tackle them than now.

Game changers

Below are four sets of ‘game-changers’ that we believe can help companies to move their reporting forward in a practical way.