Corporate Reporting Insights 2023

Surveying FTSE Annual Reports

Recent years certainly confirmed the old adage 'the only constant is change'. A rapidly evolving and challenging social, economic and political landscape means that to remain resilient businesses need to pivot quickly. Society is looking for business to lead and play its role in driving sustainable development and responding to existential challenges, including climate change, loss of biodiversity and social inclusion and equity.

Investors and other stakeholders, including customers, employees and policy makers are looking for companies to be transparent about how they are responding to these priorities and challenges, and governments and regulators are issuing new mandatory corporate reporting requirements.

We decided to change our approach to our annual corporate reporting insights from publishing once a year to bringing you more timely, shorter and topical observations designed to help you navigate new disclosure requirements, emerging practices, and growing expectations for greater transparency and accountability.

Explore our reports to discover these trends in corporate reporting.

Explore our 2023 reports

Click here to read Corporate Reporting Insights 2022

Diversity & Inclusion

Are companies ready for the new Listing Rule?

The FCA has introduced a new Listing Rule for premium and standard listed companies to provide disclosures on board and leadership diversity, reflecting the drive for transparency around social issues. Although this takes effect for periods commencing on or after 1 April 2022, the regulator has encouraged December 2022 year end companies to provide the new disclosures voluntarily where feasible.

Our survey looks at how the first 30 FTSE 350 December 2022 reporters are getting ready for greater transparency around board and leadership diversity: we look at whether companies are already complying with the new Listing Rule requirements or moving their disclosures closer towards full compliance.

Read the full report

Key takeaways

53% of companies had met or exceeded the target of 40% of the board being women; 97% had at least one minority ethnic director on the board

70% of companies explained persuasively why workforce diversity and inclusion was important to the business – but only 33% referenced diversity and inclusion in disclosures on board decision-making

Companies that successfully integrated diversity and inclusion throughout their culture reflected it throughout the annual report, in some cases including in the Chair and CEO statements

Only 17% of companies responded to the FCA’s call to voluntarily include the new Listing Rule diversity disclosures in full

Actions to take:

Assess whether the annual report explains in a clear and consistent way why diversity and inclusion at workforce, executive management, and board level is important to the business.

Evaluate the board’s existing approach for building diversity and inclusion into succession planning and evaluation and consider how to report transparently in this area.

When adopting the new FCA Listing Rule, include all elements:

an identifiable statement setting out that each of the targets in the Rule have been achieved or a plan to achieve them;

both mandated tables on sex or gender identity and ethnicity; and

clarity in the explanation of how data has been gathered.

Audit Tendering

Reporting under the new Minimum Standard

The FRC’s recently published Audit Committees and the External Audit: Minimum Standard calls for more informative disclosure regarding the audit committee’s oversight of the external auditor and the tender of the external audit. Although not yet mandatory, the FRC encourages audit committees to have regard to the provisions in the Minimum Standard.

Our survey looks at how 25 of the most recent FTSE 350 companies that have both undertaken an external audit tender and published their subsequent annual report measure up to the expectations in Minimum Standard Provision 25.

Read the full report

Key takeaways

68% of audit committees described their auditor selection criteria. All but one described at least one audit quality measure

Of those that described selection criteria, 41% considered price or cultural fit, which the Minimum Standard indicates should not influence the choice of auditor

Only 40% described an audit tendering process that was clearly led by the audit committee

28% of audit committees reported that public reports published by the FRC or other regulators had been used in the selection process

64% of our sample were conducting a tender at the ten-year mark where they could reappoint the incumbent. Of these, half chose to change auditor

Actions to take:

Assess whether the audit committee report expresses clearly how the audit committee has led the audit tender process and their involvement throughout

Consider whether the areas proposed as part of the process by the Minimum Standard can be drawn out – for instance, looking at public reports published by the regulator, or at audit quality indicators (AQIs)

Evaluate the audit committee’s approach to establishing suitable criteria for the audit tender and how to report transparently about how these criteria have been applied fairly

Climate Transition Plan Disclosures

Now and future

With climate change at the top of global priorities, investors and regulators are calling for greater transparency on companies’ progress and performance against their climate-related commitments and their readiness for climate transition. Both the Taskforce on Climate-related Financial Disclosures (TCFD) 2021 Guidance for All Sectors and the ISSB’s new sustainability disclosure standard on Climate-related Disclosures (IFRS S2) include disclosure of an organisation’s plans to transition to a low-carbon economy and later this year, the UK government is expected to consult on the introduction of transition plan disclosure requirements for the UK’s largest companies, drawing on the work of the UK’s Transition Plan Taskforce (TPT).

Our survey of annual reports looks at the first 50 FTSE 100 December 2022 reporters and considers how reporting of their transition plans compares to the TCFD recommended disclosures and expected future requirements.

Read the full report

Key takeaways

98% of companies disclosed one or more climate-related target with 92% indicating the timeframe over which the targets apply

56% of companies included information about their plans to transition to a low carbon economy, 36% included ‘some but limited’ information and 8% provided no disclosures

20% of companies provided a link from their Annual Report to a standalone report described as a transition plan, with a further 18% stating that one was in development, to be published in 2023 or 2024

6% of companies stated that they had considered the TPT proposed Disclosure Framework when preparing their 2022 disclosures and an additional 12% stated that they intend to produce TPT aligned disclosures going forward

25% clearly identified the board, board member or a board-level committee with oversight and accountability responsibilities for the transition plan

80% of companies disclosed long term climate-related targets of 2040 and beyond, with 10% also disclosing interim targets beyond 2030

Actions to take:

Establish clear lines of responsibility and reporting for the development, implementation, and monitoring of a transition plan

Evaluate existing commitments and transition plans to ensure interim targets are set at appropriate intervals across the full target horizon and clear actions are developed and agreed on how to achieve climate-related targets

Get ready for evolving transition plan disclosure requirements:

Assess existing disclosures to ensure information is consistent with the TCFD recommended disclosures on transition plans

Provide clear signposting and cross-referencing to transition plan disclosures

Use clearly defined and consistent terminology to describe transition plan information

Evaluate the ISSB’s new Climate Standard (IFRS S2) and the proposed TPT Disclosure Framework to understand where further disclosures may be required

Engage proactively and respond to the UK government’s consultation on transition plans (expected later in 2023)

Generative Artificial Intelligence

Risks and opportunities

Artificial intelligence and machine learning have been part of the structure of digital development for many years. However, the new technological advances offered by Generative AI in the form of ChatGPT became available to the public in November 2022 and gained substantial media attention in the spring of 2023. Our survey of the most recent annual reports published by the constituent companies of the FTSE 100 index looks at whether and how the FTSE 100 have considered the risks and opportunities offered by Generative AI in their most recent annual reports and, for those who published a January 2023 or earlier report, whether they have updated the principal risks listed in their half-yearly report to include AI.

Read the full report

Key takeaways

Half of the FTSE 100 mentioned AI in their most recent annual report. However, only 5 companies clearly differentiated between traditional AI (machine learning) and Generative AI.

Six companies disclosed that they had directors with experience or expertise in AI. Four of those six mentioned board discussions on the topic.

Three companies added AI to the description of principal risks in their half-yearly report; two further companies added Generative AI to an existing AI-related risk.

Actions to take:

With growing stakeholder interest, we encourage boards to make it clear to users of the annual report how they considered the opportunities offered and risks posed by Generative AI and any potential impact on their business model and strategy.

A description of the controls and policy frameworks applicable to Generative AI, both used by the company and imposed on employees, is also helpful to aid stakeholder understanding.

Boards may want to consider the need for appropriate technical knowledge and expertise in order to enable them to exercise their governance and oversight responsibilities in a rapidly developing digital landscape.

Diversity & Inclusion:

Are companies ready for the new Listing Rule?

Corporate Reporting Insights 2023

The background to our survey

The FCA oversees the Listing Rules and has introduced a new requirement for premium and standard listed companies to provide disclosures on board and leadership diversity, reflecting the drive for transparency around social issues. Although the new Rule takes effect for periods commencing on or after 1 April 2022, the regulator has encouraged companies to provide the new disclosures voluntarily where feasible.

Are companies ready for greater transparency around board and leadership diversity?

Our survey looks at how the first 30 FTSE 350 December 2022 reporters are getting ready for greater transparency around board and leadership diversity: we look at whether companies are already complying with the new Listing Rule requirements or moving their disclosures closer towards full compliance.

In our survey we looked at how companies integrate diversity and inclusion into their purpose, culture, values, strategy, succession planning, reward, and board evaluation.

Click here for the Listing Rule disclosure requirements on board and leadership diversity

Provide a statement setting out whether the company has met the following targets on board diversity as at a chosen reference date within its accounting period:

At least 40% of the individuals on its board of directors are women;

At least one of the senior positions on the board of directors is held by a woman – the chair, the chief executive, the senior independent director, or the chief financial officer; and

At least one individual on the board of directors is from a minority ethnic background.

In cases where the company has not met all these targets, state the targets it has not met and the reasons for not meeting those targets.

Set out the reference date used for the statement and if it is not the same as the year end date, an explanation as to why.

Disclose numerical data: a table in a set format for each of the ethnic background and the gender identity or sex of the individuals on the board and in executive management.

Provide an explanation of the approach to collecting the data used for the purposes of making all the disclosures above; that should be consistent for all elements of the reporting and across all individuals. The explanation should include the method of collection and / or source of the data, and where data collection is done on the basis of self-reporting by the individuals concerned, it should include a description of the questions asked.

This survey is accompanied by a downloadable checklist to help companies achieve compliant practice in diversity disclosure under the new Listing Rule.

Download The Diversity Listing Rule Checklist

The new Listing Rule statement

Only five companies in our sample had presented a statement indicating that they complied with the requirements of the new Listing Rule in advance of the effective date (17%). One additional company presented much of the relevant information and stated that it intends to present a full statement of compliance for the 2023 year end.

About half of the remaining companies mentioned the new Listing Rule and explained that they had either already amended targets (in most cases with an indication of where they are in relation to those targets) or that they planned to revisit their policies during 2023.

The Listing Rule requires a set format for two separate tables - reporting on sex or gender identity and on ethnic diversity. This is intended to make it more straightforward for investors to compare data across different reports. While 46% provided all or almost all the required data, only the five companies voluntarily complying early had produced data in the required format. For those who disclosed the required data, it wasn’t always obvious whether they were reporting on sex or on gender identity as required by the FCA and some conflated the two. Only five companies were clear that they had reported on gender identity, four of which were voluntarily complying early with the Listing Rule.

Six companies explained the approach they had taken to collecting the data used for the purposes of making diversity disclosures at board and executive level. Only two companies clearly described the questions asked when self-reporting was used, with one explaining that the categories reported on for gender identity included gender fluid, intersex, non-binary, transgender, or other gender.

Have companies already met the Listing Rule targets?

Workforce diversity and inclusion

All the companies in our sample included information about diversity and inclusion policies both at workforce and board level. A number of companies also incorporated policies and actions around equity at workforce level. One company added “belonging” to reflect one of its corporate values “Create Belonging” – diversity, equity, inclusion and belonging, and provided a case study illustrating belonging as the result for individuals of consciously inclusive behaviour.

Almost all included information about actions and the outcomes of those actions for driving diversity and inclusion.

The most effective examples demonstrated through their disclosures a clear commitment to embedding genuine diversity as an opportunity to strengthen business and look both at and also beyond traditional diversity characteristics. We identified disclosures focusing on disability, neurodiversity, sexual orientation, indigenous peoples and socioeconomic diversity, in addition to the sex or gender identity and ethnic diversity focused on by the FCA.

Examples of actions to drive workforce diversity and inclusion

Training activities

Specific focus on marginalised groups

New approaches to recruitment at workforce level, either for particular groups or more broadly – for example, the option of remote interviewing

Fostering inclusion through workforce support groups

Mentoring schemes

Recognising important festivals or memorial days

Incorporating diversity and inclusion targets into feedback mechanisms throughout all levels of the organisation

Reporting on an ethnicity pay gap as well as a gender pay gap

Focus on on recognising, avoiding and addressing microaggressions

Updated policies with regard to parental leave to improve equitable outcomes, in several cases offering the same leave for men and women

Board diversity and inclusion: succession planning and evaluation

Diversity and inclusion are inextricably linked to the quality and thoughtfulness of succession planning throughout the organisation, including at executive and board levels. We have examined what companies say about how they instruct search and recruitment agencies and how they set up their board effectiveness evaluation processes.

The UK Corporate Governance Code requires companies to describe the work of the nomination committee and the process used in relation to appointments, the approach to succession planning, and how both support developing a diverse pipeline.

Although 57% of companies mention diversity in the broadest sense when talking about planning for skills and experience at board level, comparatively few companies set out how they make the appointment process accessible to a wider pool of talent. In some cases the accessibility of recruitment has been drawn out for the workforce but this is not reiterated in the nomination committee’s report in respect of board and executive team searches.

Do succession planning disclosures reflect diversity and inclusion

Only a third of companies discussed how they have incorporated consideration of diversity and inclusion into the board effectiveness evaluation process. Terms of reference and instructions to evaluators are critical here and can support the board’s regular review of the effectiveness of their diversity and inclusion policies and the quality of their assessment of actions and outcomes.

Do board evaluation disclosures reflect diversity and inclusion initiatives?

Reporting on how diversity and inclusion is embedded into the business

The FRC has highlighted the need to draw out in the annual report why diversity and inclusion are important to the strategy of the business. Although this continues to be a challenge for companies to articulate, we were encouraged to find that 70% explained persuasively why workforce diversity and inclusion was important to the business.

However, only 53% explained why diversity and inclusion at board level was important to the business. This often focused on diversity, in the broadest sense, enabling strong decision-making and helping reduce the risk of groupthink. The link to business strategy, nonetheless, wasn’t very clear and most companies could be more effective at explaining it and demonstrating connected thinking throughout their annual report.

Although the importance of diversity and inclusion came through clearly in the disclosures on the workforce, only half of companies in our survey carried this through to their values and strategy, and even fewer to their KPI disclosures (with those KPIs overwhelmingly being about proportion of women in the workforce). Only a third of companies reflected diversity and inclusion in their disclosures on board decision-making, which often form part of the s172(1) statement, and even then these were primarily focused on the diversity and inclusion policy itself.

The approach used to improve diversity and inclusion varied between companies, but the majority focused on both building from the ground up and through external recruitment, with 75% including statements about developing diversity and inclusion throughout the business via culture change and the existing workforce.

Where do companies incorporate disclosure on diversity and inclusion?

To conclude

It is clear that not many companies have heeded the FCA’s call to report early and most have further to go both in terms of meeting the targets set by the FCA and clarity of diversity and inclusion disclosures.

Boards should take this opportunity to revisit their current policies and approach to diversity and inclusion and challenge themselves whether diversity and inclusion are appropriately embedded into their companies’ culture, values, strategy, succession planning, reward, and board evaluation. Boards should also consider what diverse voices they seek, noting that some elements of diversity, which can add real value in board decision-making, are not covered in the new regulation – such as a diversity of background, experience, nationality and the critical but nebulous “diversity of thought”.

Actions to take:

Assess whether the annual report explains in a clear and consistent way why diversity and inclusion at workforce, executive management, and board level is important to the business.

Evaluate the board’s existing approach for building diversity and inclusion into succession planning and evaluation and consider how to report transparently in this area.

When adopting the new FCA Listing Rule, include all elements:

an identifiable statement setting out that each of the targets in the Rule have been achieved or a plan to achieve them;

both mandated tables on sex or gender identity and ethnicity; and

clarity in the explanation of how data has been gathered.

Audit tendering:

Reporting under the new Minimum Standard

Corporate Reporting Insights 2023

The background to our survey

Following the government’s consultation on Restoring trust in audit and corporate governance, the FRC was tasked with introducing a minimum standard for FTSE 350 audit committees in the area of the appointment and oversight of external auditors. A draft was published for consultation towards the end of 2022 and the final version, Audit Committees and the External Audit: Minimum Standard (the Minimum Standard) in May 2023.

Although the Minimum Standard will not be mandatory until legislation is passed to form ARGA, the FRC explains that it takes effect immediately on a comply or explain basis. The majority of the text in the Minimum Standard was drawn from existing FRC good practice guidance.

This survey focuses on Minimum Standard Provision 25: If a tender process has taken place within the year, the Audit Committee should explain the criteria used to make the selection and the process followed.

Click here for the Minimum Standard Tendering Provisions

Minimum Standard Provision 25

If a tender process has taken place within the year, the Audit Committee should explain the criteria used to make the selection and the process followed.

The Minimum Standard sets out expectations regarding audit tendering, including the criteria used to make the selection and the process followed:

Provision 6: Public Interest Entities (PIEs) are currently required to put their audits out to tender every ten years, and to rotate auditors every twenty. The tendering process should be led by the Audit Committee and not by the entity’s executive management. This includes initiating a tender process, influencing the appointment of an engagement partner, negotiating the fee and scope of the audit, and making formal recommendations to the board on the appointment, reappointment and removal of the external auditors. Audit Committees may, of course, make use of the entity’s employees for research and evaluation.

Provision 7: The tendering process must not preclude the participation of “challenger” audit firms without good reason. There is a strong public interest in audit market diversity and the market as a whole having sufficient resilience, capacity and choice. To support this, Audit Committees should ensure companies have a sufficient number of potential auditors that are independent, or capable of becoming so, to allow for adequate competition and choice in a subsequent tender. Tenders should also be conducted far enough in advance of appointment for firms to exit relationships which may cause a conflict of interest.

Provision 8: The selection criteria should be transparent and non-discriminatory. When considering possible new appointees as external auditors, the Audit Committee should oversee the selection process, and ensure that all tendering firms have the necessary access to information and individuals during the tendering process and that all tenders, including non-Big Four firms, are given fair and objective consideration.

Provision 9: The choice of auditor should be based on quality, including independence, challenge and technical competence, not price or perceived cultural fit. Public reports published by the FRC and where relevant other regulators, including those overseas, on the quality of each firm’s audit should be scrutinised as part of the process. Audit Committees should also review audit quality indicators published by firms and / or the FRC.

Provision 10: All members of the Audit Committee should be involved throughout the tender process, not just attending the audit firms’ final presentations

Provision 11: A typical tender process may involve three or four audit firms. In some industries, however, there may be circumstances such as limited numbers of firms with the necessary expertise that make it difficult to identify more than two. Companies should manage their relationships with audit firms to allow them sufficient choice in a future tender and to take account of the need to expand market diversity and any market opening measures that may be introduced.

Provision 12: Audit Committees should submit two possible audit firm options for the engagement to the Board, together with a justified preference for one of them.

Provision 13: The Audit Committee should consider running a price-blind tender.

Provision 14: If some eligible audit firms are unwilling to tender for an audit, the Audit Committee should communicate with those firms to understand why they are unwilling to tender and whether there is anything that could be done to change that. The Audit Committee should also consider asking those firms how such action is in the public interest. In such circumstances, the Audit Committee should ensure that it has not excluded other firms from tendering without good reason to believe they would not be able to perform a high-quality audit. The Audit Committee should remind eligible firms that refuse to tender that they may as a result be ineligible to bid for non-audit services work.

How do audit committees discuss the external audit tender?

Public interest entities, including all FTSE 350 companies, are required to tender the external audit at least every ten years, and if they have had the same auditor for twenty years they must appoint a new auditor.

32% of our sample had to appoint a new auditor having had the same auditor for twenty years; 64% were tendering at the ten-year mark, with the incumbent auditor invited to participate. The audit committee of the remaining company had chosen to undertake a tender outside the usual cycle to align with mandatory partner rotation.

All of the companies in our sample that were approaching mandatory tender dates conducted their tender at least one full calendar year in advance of the new auditor needing to take office. Some mentioned “cooling in” requirements for independence and others the risk of firms facing a glut of tender requests in the run-up to 2024 – ten years after the legislation came into effect.

All of the audit committees discussed the tender results in their audit committee report. 12% of annual reports in our sample also included the audit tender as a key decision of the Board for the year.

Audit tender results at the ten-year mark

Criteria used to make the selection

Only 68% of audit committees described criteria used to make the selection. Two further audit committees said only that a comprehensive or robust set of criteria had been used, without providing any further details.

Of the audit committees that described criteria, only 35% indicated that these had been transparent to the firms tendering and only one stated that they believed the criteria to be non-discriminatory (both matters to consider under Provision 8 of the Minimum Standard).

94% of audit committees that described the criteria used included at least one on audit quality – encompassing independence, challenge, including professional scepticism, and technical competence.

The Minimum Standard encourages audit committees not to allow the choice of auditor to be influenced by pricing or perceived cultural fit (Provision 9), however we found that 41% of audit committees that described their selection criteria included one or both of price and cultural fit.

The table opposite shows all criteria that were mentioned in three or more annual reports. Other criteria that were mentioned by only one or two audit committees included transitional arrangements, the audit firm’s diversity and people development, value-add, the attitude of the audit team, ESG assurance credentials, and alignment of the firm with ESG or sustainability values.

It is interesting to note that both audit committees that mentioned transitional arrangements as a criterion reappointed the incumbent auditor at the ten-year mark. A further audit committee that reappointed the incumbent cited satisfaction with their existing auditor as a selection criterion.

None of the audit committees described undertaking a price-blind tender – where the audit committee is not informed of the quoted price and thus the focus of the evaluation is on quality – which Minimum Standard Provision 13 suggests should be considered.

What criteria did the audit committee consider when appointing an auditor?

Process followed to make the selection

The majority of tender processes were described as led fully or partly by the audit committee of the entity. In several cases this involved the audit committee forming a selection committee (or similar group) which was comprised in whole or in part of executive management. In a handful of cases it was that selection committee that established the criteria for the external audit tender or that pre-selected the candidates for the final presentation to the audit committee.

24% of audit committees did not include enough information to determine who led the process or what the process involved.

Elements of the process followed to make the selection included:

Inviting firms to submit “pre-qualification” information after which a smaller number of firms were invited to tender

Meeting several proposed audit partners for each potential tender candidate, after which certain firms were invited to tender with a specific audit partner

Setting up a data room for all firms

Establishing a set series of meetings for tendering firms to undertake

Providing “opportunities” to ask questions of key personnel or to visit key sites

28% of audit committees reported that public reports published by the FRC or other regulators had been considered in the selection process; only one audit committee reported that they had considered other external metrics.

Who is described as leading the tender process?

Audit market diversity

The FRC has been tasked with focusing on measures to enhance competition, choice and resilience in the audit market. One of the key areas under the Minimum Standard is the encouragement of audit committees to consider audit market diversity and to include challenger firms in tenders, defined as those outside the Big 4.

It was encouraging to see that 40% of disclosures included the consideration of challenger firms, either at initial stages of the invitation to tender or in some cases up to the final presentation stage. However, none of the companies in our sample appointed a challenger firm as auditor following the tender process.

It is worth noting though that several audit committees that invited multiple firms to tender, including challenger firms, indicated that certain firms did not take up the invitation. Furthermore, one company was unable to find two firms to tender for the audit and needed to seek an extension from the FRC.

To conclude

There is scope for audit committees to improve and clarify their audit tendering disclosures by taking into account the reporting provisions of the Minimum Standard. The better reports we saw drew out different elements of audit quality as key selection criteria, including independence, challenge, professional scepticism and technical competence.

Audit committees who plan to comply with the Minimum Standard will also wish to take the opportunity to think about the process they undertake – how it is led, who is invited to participate, what information is considered, how fair and objective the decision-making process is.

And finally, we saw a small handful of audit committees already going beyond the contents of the Minimum Standard: two said they had consulted with major shareholders in advance of the audit tender to take their views into account – and one further company had consulted with other companies that had been through a recent tender to understand their experiences.

Actions to take:

Assess whether the audit committee report expresses clearly how the audit committee has led the audit tender process and their involvement throughout

Consider whether the areas proposed as part of the process by the Minimum Standard can be drawn out – for instance, looking at public reports published by the regulator, or at audit quality indicators (AQIs)

Evaluate the audit committee’s approach to establishing suitable criteria for the audit tender and how to report transparently about how these criteria have been applied fairly

Climate transition plan disclosures:

Now and future

Corporate Reporting Insights 2023

The background to our survey

Transition plans represent an important part of a company’s overall response to climate change. They help companies to develop credible actions, set milestones and put in place metrics consistent with their overall ambitions in relation to the transition to a low-carbon economy. Investors and regulators are calling for greater transparency on companies’ progress and performance against their climate-related commitments resulting in increased demand for comprehensive climate transition plans disclosures.

In 2021, the Taskforce on Climate-related Financial Disclosures (TCFD) updated its Guidance for All Sectors to include disclosures on an organisation’s plans to transition to a low-carbon economy. UK listed companies, required to prepare a statement setting out whether they have made disclosures consistent with TCFD recommendations, must use this updated guidance in doing so.

The Green Finance Strategy – Mobilising Green Investment, published in March 2023, set out the UK government’s commitment to adopt the ISSB’s sustainability disclosure standards. IFRS S2 Climate-related Disclosures, published in June 2023, includes requirements for companies to report on their plans to transition to a low carbon economy. The UK government also set out its intention to consult specifically on the introduction of transition plan disclosure requirements for the UK’s largest companies, drawing on the work of the UK’s Transition Plan Taskforce (TPT). The TPT was set up by the UK government in 2022 with a two-year mandate to ‘develop the gold standard for private sector climate transition plans’. The final Disclosure Framework and Implementation Guidance are expected to be published in Autumn 2023.

Our survey of annual reports* looks at the first 50 FTSE 100 December 2022 reporters and considers how their reporting compares with the TCFD recommended disclosures on targets and transition planning. The survey also considers the state of readiness of companies for the expected future requirements.

*For the purposes of this survey, we considered disclosures included within the Annual Report and any other relevant document that was clearly referenced from the Annual Report, for example a separate TCFD report, sustainability report or standalone transition plan.

Transition plan definition

A transition plan is ‘an aspect of an organization’s overall business strategy that lays out a set of targets and actions supporting its transition toward a low-carbon economy, including actions such as reducing its GHG emissions’ (TCFD)

Reporting against the TCFD guidance

Climate-related targets

98% of companies disclosed one or more climate-related targets. Given that scope 3 emissions often form the majority of an organisation’s total emissions, it was encouraging to see that 88% of companies included some or all of their Scope 3 emissions in their GHG-related targets.

In line with the TCFD’s recommended disclosures related to climate-related targets:

92% of companies disclosed the timeframe over which all the targets apply

98% of companies disclosed the base year from which progress is measured

90% of companies clearly identified if the target was absolute or intensity based

78% of companies identified the metrics used to assess progress against all of their climate-related targets. For the remaining 22% companies, metrics in relation to climate-related targets other than GHG-related targets were not always clearly identifiable.

Click here for more information on TCFD’s 2021 guidance related to transition plan disclosures

Section C of the TCFD’s 2021 Guidance for All Sectors includes the following recommendation relevant to transition plans:

Strategy: Organizations disclosing medium-term or long-term targets should also disclose associated interim targets in aggregate or by business line, where available.

The 2021 Guidance for All Sectors now includes an additional recommendation related to climate-related targets as follows:

Metrics and Targets: Organizations disclosing medium-term or long-term targets should also disclose associated interim targets in aggregate or by business line, where available.

This recommendation sits alongside TCFD’s pre-existing recommendations on targets, as set out below:

In describing their targets, organizations should consider including the following:

whether the target is absolute or intensity based;

time frames over which the target applies;

base year from which progress is measured; and

key performance indicators used to assess progress against targets.

Where not apparent, organizations should provide a description of the methodologies used to calculate targets and measures.

The TCFD also published Guidance on Metrics, Targets and Transition Plans which includes information on the characteristics of effective climate-related targets and transition plans, as well as further guidance on disclosures.

As required by the FCA’s Listing Rules, for financial years beginning on or after 1 January 2022, listed companies should use the TCFD’s 2021 Guidance for All Sectors and the Guidance on Metrics, Targets and Transition Plans when forming a conclusion as to whether they have made disclosures consistent with TCFD’s four recommendations and eleven recommended disclosures.

Interim targets

The TCFD’s 2021 Guidance for All Sectors also recommends that ‘organizations disclosing medium-term or long-term targets should also disclose associated interim targets in aggregate or by business line, where available’.

Given the importance of interim targets to support early action on climate change, companies are encouraged to take action now on setting interim targets at appropriate intervals across the full target horizon.

Click here for more information on interim targets

The TCFD Guidance on Metrics, Targets and Transition Plans recommends that interim targets are ‘set at appropriate intervals (e.g., 5-10 years) covering the full medium- or long-term target horizon’

IFRS S2 Climate-related Disclosures requires companies to disclose 'any milestones and interim targets’.

Disclosures about transition plans

56% of companies included disclosures that were identifiable as plans to transition to a low carbon economy. An additional 36% of companies provided some, but more limited, information, for example in the form of a high-level roadmap or disclosures that indicated how targets would be met but lacking sufficient granularity and specificity to be called a plan. For the remaining 8% of companies that provided no information on transition plans, it was encouraging to see that all referred to it in the TCFD compliance statement and explained when they were planning to comply.

96% of companies referred to board level responsibilities for overseeing of the companies’ response to climate change. 25% of these companies specifically referenced a transition plan as part of these responsibilities.

Identifying transition plan disclosures was sometimes challenging as climate-related disclosures were included in various locations within the Annual Report, and, in many cases, in separate reports outside of the annual report. This issue was compounded by inconsistent use of terminology between companies to describe plans to transition to a low-carbon economy, for example, transition plans, net zero action plans, climate action roadmaps.

Companies that made it easy for the user to navigate to transition plan disclosures provided:

Clear signposting to transition plan disclosures within the annual report

Clear cross-referencing from the annual report to any other reports where transition plan disclosures were included, with clear signposting of additional content. Other reports referred to included separate TCFD reports, sustainability reports and transition plan reports

Did the company disclose information on transition plans?

Click here for more information on governance

The TCFD’s Guidance on Metrics, Targets and Transition Plans recommends that a transition plan ‘should describe the approval process and oversight and accountability responsibilities within an organization, including the role of the board and senior management in overseeing the plan’.

Transition plan disclosures: expected developments

TPT: Standalone transition plans

A key recommendation of the proposed TPT Framework is that organisations publish a standalone transition plan at least every 3 years with progress against the plan ‘reported on an annual basis as part of TCFD- or ISSB aligned disclosures’.

20% of companies in the survey cross referred from the annual report to a separate report described as a standalone transition plan, with only one of these companies stating that they had considered the proposed TPT framework. Another 18% of companies stated their commitment to publishing a separate transition plan in 2023 or 2024.

A fifth of the companies publishing standalone transition plans were rated as having ‘some but limited information’ about their plans to transition to a lower carbon economy, confirming that having a separate document does not automatically lead to better and more comprehensive content.

Click here for information on the most recent developments related to transition plan disclosures

The FCA already encourages listed companies to consider the TPT’s proposed Disclosure Framework and Implementation Guidance, published for consultation in November 2022.

The Green Finance Strategy – Mobilising Green Investment, published in March 2023, set out the UK government’s commitment to consult on ‘the introduction of requirements for the UK’s largest companies to disclose their transition plans if they have them’. The consultation, which is expected in the second half of 2023, will draw on the TPT’s final Disclosure Framework and Implementation Guidance which are anticipated to be published in Autumn 2023.

The Green Finance Strategy also reinforced the UK government’s commitment to adopt the ISSB’s new sustainability disclosure standards, with the aim to make an endorsement decision within 12 months of the final standards being published.

The ISSB published its first two standards in June 2023:

IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information

IFRS S2 Climate-related Disclosures

IFRS S2 sets out requirements for identifying, measuring, and disclosing climate related risks and opportunities and includes specific requirements related to targets and transition plans.

Did the company reference the UK's Transition Plan Taskforce?

How ready are companies for transition plan disclosures under IFRS S2 Climate-related Disclosures?

32% of companies made some reference to the work of the ISSB. The most common references were to communicate that the board were monitoring developments and/or considering how to align disclosures based on the Exposure Drafts of the first two standards (IFRS S1 and S2).

With the publication of these first two standards in June 2023, and the UK government’s commitment to adopt them within 12 months of publication, companies are encouraged to engage early with the new standards to understand where further work might be required to comply with any new disclosures that go beyond TCFD’s disclosure recommendations. Two areas with new disclosure requirements are set out below.

Validity of targets

IFRS S2 requires disclosures about the validity of climate-related targets. Survey findings on current disclosures in this area are set out in the table below.

IFRS S2 requires disclosure of:	Survey findings
How the latest international agreement on climate change, including jurisdictional commitments that arise from that agreement, has informed the target	64% of companies specifically referenced the Paris Agreement when explaining how targets had been set but very few referred to any jurisdictional commitments.
Whether the target and target methodology has been validated by a third party	44% of companies disclosed that their targets had been verified by a third party. 28% of companies disclosed their intention to have their targets verified by a third party or had submitted the targets for review and were awaiting the outcome. In all but two cases, the third party referenced was the Science Based Target Initiative (SBTI). One other company referred to an independent assessment by the Transition Plan Initiative (TPI) and the other to external verification by the Carbon Trust.
Any revisions to the target and an explanation for those revisions	22% disclosed that targets had been revised during the year. In most cases, an explanation was provided with nearly half of those companies explaining that the revisions were the result of an SBTI alignment or validation process.
The entity’s processes for reviewing the target	18% of companies stated that targets had been reviewed but with little information provided on how this review was performed.

Compliance with some of these disclosures will be relatively straightforward, for example, confirming if a target has been revised or validated by a third party. Other disclosure requirements may require more work and early consideration. For example, the ability to disclose the process for reviewing targets will depend on the maturity of a company’s approach to its transition plan and whether a process has been established and embedded into the organisation’s governance structure and internal control systems.

Click here for more information on IFRS S2 carbon credit disclosure requirements

36. For each greenhouse gas emissions target disclosed in accordance with paragraphs 33–35, an entity shall disclose:

(e) the entity’s planned use of carbon credits to offset greenhouse gas emissions to achieve any net greenhouse gas emissions target. In explaining its planned use of carbon credits the entity shall disclose information including, and with reference to paragraphs B70–B71:

(i) the extent to which, and how, achieving any net greenhouse gas emissions target relies on the use of carbon credits;

(ii) which third-party scheme(s) will verify or certify the carbon credits;

(iii) the type of carbon credit, including whether the underlying offset will be nature-based or based on technological carbon removals, and whether the underlying offset is achieved through carbon reduction or removal; and

(iv) any other factors necessary for users of general purpose financial reports to understand the credibility and integrity of the carbon credits the entity plans to use (for example, assumptions regarding the permanence of the carbon offset).

Use of carbon offsets

IFRS S2 requires disclosures on the planned use of carbon offsets to achieve greenhouse gas emissions targets (referred to as ‘carbon credits’ within the standard).

6% of companies stated that they did not use carbon offsets or intend to use carbon offsets to meet their climate-related targets.

64% of companies referred to using carbon offsets, with just under half providing some quantitative information on the extent to which targets are dependent on the offsets. This information was typically expressed as a percentage of the target that would need to be met with the use of offsets.

For 30% of companies, there was a lack of clarity around the use of carbon offsets, meaning additional information will need to be provided by companies to meet the disclosure requirements under IFRS S2. This includes a specific requirement to disclose ‘whether the target is a gross emissions target or net emissions target’. Where a net emissions target is disclosed, a separate gross emissions target will also need to be disclosed.

Does the company use, or intend to use, carbon offsets?

Transition plan disclosures

Consistent with TCFD, IFRS S2 requires companies to disclose its plans to transition to a lower carbon economy and, specifically, how it will achieve the greenhouse gas emissions targets it has set for itself and those required by regulation or legislation.

In its Guidance on Metrics, Targets and Transition Plans, TCFD state that organisations should ‘consider describing the assumptions, uncertainties, and key methodologies associated with their transition plans'. IFRS S2 formalised this, requiring disclosure of key assumptions that the entity has made and dependencies it has identified in developing the plan. In general, companies did not provide this information with many providing little or no information at all. As transition plans develop and evolve, companies will need to consider how this information is reflected in their disclosures.

Click here for more information on IFRS S2 transition plan disclosure requirements

14 (a) Specifically, the entity shall disclose information about:

(iv) any climate-related transition plan the entity has, including information about key assumptions used in developing its transition plan, and dependencies on which the entity’s transition plan relies; and

(v) how the entity plans to achieve any climate-related targets, including any greenhouse gas emissions targets, described in accordance with paragraphs 33–36.

To conclude

For companies required to prepare a TCFD compliance statement under the FCA’s Listing Rules, it is clear that there is room for improvement in transition plan disclosures. With the FCA encouraging listed companies to consider the Transition Plan Taskforce’s proposed framework, and a government consultation on transition planning on the horizon, it is also clear that enhanced transition plan disclosures will be expected in the future.

To get ready for these changes, boards should consider whether the company has the governance structures and controls in place to develop, implement and monitor robust transition plan. Boards should also take the opportunity to evaluate the ISSB’s new Climate Standard, IFRS S2, and the TPT Disclosure Framework, once finalised, to understand where further disclosures may be required.