Investors and other stakeholders are increasingly focused on the actions companies are taking on environmental, social and governance (ESG) commitments - particularly how they are tackling climate change.
Our global ESG investor survey found nearly 80% of respondents acknowledge the importance of ESG in their investment decision-making. But the vast majority felt the quality of information they get from companies on environmental issues isn’t good enough.
Accurate, transparent and accessible reporting is critical for supporting a sustainable future. It builds trust in the actions organisations are taking to tackle climate change and to understand the impact it is having on their business.
But responsibility does not rest solely with companies, or their auditors. Regulators have a critical role to play. And while new regulations in this area have been welcome, companies are facing implementation challenges and there are a number of changes that could be made to help.
Challenges: overlapping and conflicting requirements
In the UK there is no single regulatory body that issues and oversees narrative reporting requirements, often leading to overlap, duplication, and conflicts, which can create confusion.
To give an example, a UK-incorporated premium-listed company must consider up to six different environmental reporting requirements[1] from three different regulatory bodies[2], which can impact several areas of the annual report. These include for the first time a significant requirement under the Listing Rules to report on the recommendations of the Taskforce on Climate-related Financial Disclosures (the ‘TCFD’). Next year, this same company will also be caught by the new Companies Act requirements. These requirements are similar to TCFD requirements, but with some differences. For example, under the Listing Rules a company has the option to explain why they have not reported consistently with the TCFD framework. However, it is unclear if this same option is available under the Companies Act, although recent guidance from BEIS suggests compliance with the Listing Rules on TCFD would fulfil the Companies Act requirements.
Challenges: numerous qualifying criteria
Another challenge is determining the reporting requirements that apply to each type of entity. For example, organisations will have different requirements based on whether they are UK-incorporated, a Public Interest Entity (PIE), traded, quoted, AIM-listed, an LLP, whether they meet two of the three criteria of a ‘large’ company, have more than 500 employees, have turnover of more than £500m, are premium-listed, or are a subsidiary consolidated into a larger group’s reporting. This presents a huge range of possible outcomes, reducing comparability for investors and increasing the risk of non-compliance.
This complexity goes beyond ESG to a wide and growing range of reporting requirements. Just recently, the Government’s response to the consultation ‘Restoring trust in audit and corporate governance’ saw the definition of a PIE broadened, resulting in a further set of different qualifying criteria. An ambitious company will trip over an assortment of different thresholds as it grows and potentially raises capital. So it is not only difficult to work out which reporting requirements apply to an entity's specific circumstances at a point in time, but even more so as those circumstances change.
Challenges: the expanding annual report
These are really important disclosures, but as reporting requirements grow, so does the length of annual reports and there is a danger that disclosures can get lost. Last year saw the length of FTSE 350 companies’ strategic reports grow 15%, and we expect continued expansion with more regulations on the horizon. Rather than improve transparency, this could reduce the accessibility of reporting and erode trust.
What could be done
Streamlined corporate reporting regulations will be key to supporting the transition to a more sustainable future. UK regulators can drive best practice in this area by:
- Revisiting existing regulations to ensure every component of the annual report has a clear purpose, they complement each other, and do not replicate, overlap or conflict.
- Reviewing qualifying conditions and exemptions for corporate reporting around sustainability information, but also more broadly, to consider if these can be simplified.
- Regulatory bodies should collaborate to ensure new requirements complement the existing regime, are proportionate and supported by timely guidance.
- Embracing technology and considering how it can allow users to access the elements of corporate reporting they want to see.
- Creating the right incentives, and promoting good behaviours to support the evolution of best practice reporting.
I hope you found this blog interesting. I welcome your views. If you would like to discuss this in more detail, please get in touch.
[1] Companies Act 2006 s414C, s414CZA & s414CB, The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018, Listing Rule 9.8.6R (8), and 2018 UK Corporate Governance Code provision 5.
[2] Department for Business, Energy and Industrial Strategy (BEIS), Financial Conduct Authority (FCA), and Financial Reporting Council (FRC).
