As COP28 kicked off in Dubai at the end of last year, a group of international accounting bodies called for regulators to ensure that sustainability reporting helps to provide better information for those driving climate action across the business world. Though corporate reporting regulation wasn’t a focus for the summit, it’s worth noting that progress in the evolution and adoption of reporting standards has been ongoing. The Task Force on Climate-Related Financial Disclosures (TCFD) reporting requirements is in its third year in the UK, the International Sustainability Standards Board’s (ISSB) first two reporting standards have been effective since January, and now with the EU’s Corporate Sustainability Reporting Directive (CSRD) beginning to impact UK companies, there is more focus than ever on sustainability related reporting.
However, despite these new standards and regulations already impacting how companies approach their sustainability reporting, there is a growing challenge when it comes to building trust in their disclosures. PwC’s recent UK Investor Survey showed that 93% of respondents who invest in the UK believe that corporate reporting on sustainability performance contains at least some level of unsupported claims, an increase from last year’s figure of 89%. While UK companies are not currently an outlier in this regard, and sustainability reporting is still at an early stage, it is crucial that we understand the scale of this challenge and take steps now to address it, or risk being outpaced by the change happening in other countries.
One of the most significant issues impacting investor confidence is the disconnect between the sustainability commitments and targets that companies state, and the lack of detail provided on how they plan to meet them. PwC’s review of corporate reporting in the FTSE350 identified that 73% of companies have now set targets for climate change looking out beyond 10 years. However, when assessing a sample of their TCFD disclosures, fewer than 40% of companies disclosed specific targets and milestones, and only 14% set out a clear and detailed transition plan to achieve net zero, which is an emerging area of focus, as set out in the recent UK Transition Plan Taskforce guidance. Companies must take steps to bridge this gap, setting out clear goals, plans and interim targets, reporting regularly on the progress they’re making.
Another important hurdle relates to transparency around the data and metrics companies are using to inform their reporting. To build trust in their sustainability disclosures, companies will have to develop sufficiently robust systems, controls and governance to ensure the quality of their reporting is on a par with that of their financial statements, including for their supply chains. We’ve previously highlighted both the difficulty and the importance of addressing this issue, and note that while 62% of the FTSE350 TCFD disclosures we reviewed included at least some categories of supply chain emissions, 40% highlighted limitations in the climate-related data they use.
One of the most significant issues impacting investor confidence is the disconnect between the sustainability commitments and targets that companies state, and the lack of detail provided on how they plan to meet them.
The other core issue impacting on investor confidence is whether companies have obtained independent assurance over their sustainability reporting, and to what level. Independent assurance over front half disclosures is not yet commonplace, and much of what is commissioned is classed as limited. This is not as extensive as the reasonable assurance provided by the financial audit. Companies have the option to go further and acquire front half assurance comparable to that of an audit, but for many this would first require their climate related disclosures to be underpinned by information that is more robust, and metrics they’re willing to publish regularly.
For those companies who take this step, the potential gain in trust could be considerable. According to our UK investor survey, 85% of respondents who invest in or cover UK companies say that reasonable assurance would give them confidence in sustainability reporting to a moderate, large or very large extent. Independent assurance will also provide a more robust comparison for the statutory auditor, who is tasked with ensuring that there are no material inconsistencies between the front half disclosures, the audited financial statements, and their knowledge gained through the audit. This can help to further enhance confidence in companies’ sustainability commitments, and their climate risk mitigations.
The evolving international standards and regulatory focus on these challenges is already beginning to drive change. The Securities and Exchange Commission (SEC) exposure draft and the EU’s CSRD both mandate limited assurance to start, with a proposal to require reasonable assurance shortly afterwards. The UK had proposed a less stringent assurance regime, but even these changes have been paused along with the broader proposals for corporate governance and audit reform.
We acknowledge that the financial reporting and audit ecosystem in the UK has been built over 150 years, and that expecting sustainability reporting to match the same level of quality and assurance, in a fraction of the time, is ambitious. There will inevitably be bumps in the road, but increases in trust can only be born from companies being more transparent about the journey they’re on, and bringing their investors and other stakeholders with them. Addressing the trust deficit, at an international level, is crucial to evolving financial markets to more effectively support those companies that are doing their part in helping to tackle climate change. This evolution is advancing, and the progress that UK businesses, regulators, and the Government can make now will help to ensure we’re in a position to benefit.
