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.Our Corporate Reporting Insights focus on timely, short and topical observations designed to help you navigate new disclosure requirements, emerging practices, and growing expectations for greater transparency and accountabilityExplore our reports to discover these trends in corporate reporting.
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Diversity & InclusionAre companies achieving the targets in the new Listing Rule?
In 2022, the FCA introduced a new Listing Rule for premium and standard listed companies to provide disclosures on board and executive management diversity, reflecting the drive for transparency around social issues. The disclosures were mandatory for December reporters for the first time in 2023.Our survey looks at how the first 30 FTSE 350 December 2023 reporters have met the new Listing Rule requirements, and whether their annual reports reflect the transparency and progress that society and regulators are looking for around board diversity, executive management diversity and how diversity and inclusion are integrated within the business.Read the full report
Key takeaways
67% of companies had met or exceeded the target of 40% of the board being women; 90% had at least one minority ethnic director on the board.
70% of companies had a woman in one of the four senior board positions – unchanged from 2022.
Only 73% of companies met the Listing Rule requirement to explain how the diversity data had been gathered.
77% of boards discuss the importance for their business of achieving a diverse board – but 87% explained why workforce diversity and inclusion was important to the business.
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 board performance reviews and consider how to report transparently in this area.
Ensure that all elements of the FCA Listing Rule are included and clearly identifiable:
a 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
an explanation of how data has been gathered for the board and executive management
Climate Transition Plan DisclosuresNow 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.With the FCA already encouraging listed companies to consider the UK’s Transition Plan Taskforce (TPT) disclosure framework and the ISSB’s announcement that it is assuming responsibility for the TPT disclosure framework and related guidance, the focus on high quality transition plan disclosures is likely to remain.Now in its second year, our survey of annual reports looks at the first 50 annual reports issued by FTSE 100 reporters in 2024 and considers how reporting of their transition plans compares to the TCFD recommended disclosures and expected future requirements under UK-endorsed ISSB standards and the TPT disclosure framework.Read the full report
Key takeaways
All companies disclosed one or more climate-related target (up from 98% in 2022) and all indicated the timeframe over which the targets apply (up from 92% in 2022)
60% of companies included information about their plans to transition to a low carbon economy, 34% included ‘some but limited’ information and 6% provided no disclosures (broadly comparable with 2022)
34% of companies provided a cross-reference from their Annual Report to a standalone report described as a transition plan (up from 20% in 2022), with a further 10% stating that one was in development, to be published in 2024 or 2025
22% of companies stated that they had considered the TPT Disclosure Framework when preparing their 2023 disclosures and an additional 18% stated that they intend to produce TPT aligned disclosures going forward (up significantly from 6% and 12% in 2022)
58% clearly identified the board, board member or a board-level committee with oversight and accountability responsibilities for the transition plan (up significantly from 25% in 2022)
86% of companies disclosed long term climate-related targets of 2040 and beyond, with 26% also disclosing interim targets beyond 2030 (up from 80% and 10% in 2022)
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
Evaluate the ISSB’s Climate Standard (IFRS S2) and the TPT Disclosure Framework to identify any gaps with future requirements and opportunities to enhance current disclosures
Provide clear signposting and cross-referencing to transition plan disclosures
Use clearly defined and consistent terminology to describe transition plan information
Controls & Assurance A focus on transparency & accountability
In January 2024, the FRC issued an update to the UK Corporate Governance Code which was focused on improving the transparency and accountability of board oversight of the effectiveness of the risk management and internal control framework.This new focus on risk management and internal control is providing a catalyst for many companies to examine their existing processes and procedures to determine whether they will stand up to additional scrutiny and provide the board with the assurance they need to make a declaration on effectiveness.Our survey looks at how 50 FTSE 350 December 2023 reporters have explained their approach to controls and assurance. Considering whether the disclosures provide adequate transparency of how the board is discharging its responsibilities.Read the full report
Key takeaways
88% of companies included reference to risk appetite in the strategic report but there was significant variation in the depth and quality of the information provided on how risk appetite is used within the risk management and internal control framework.
When describing their control framework, only 44% of companies explained clearly how the three lines of defence model (operational management, internal monitoring, internal audit) operated within their organisation with 24% explaining some aspects and 32% making no reference at all.
Description of the board’s oversight of the risk management and internal control framework did not always make it clear which controls had been covered by the board’s monitoring and review activities, with oversight of non-financial reporting controls being particularly unclear:
Control type
Clearly identified as part of the monitoring and review activities
Operational
68%
Compliance
66%
Financial
78%
Financial reporting
64%
Non-financial reporting
30%
Ahead of the Code requirement for a formal declaration on the effectiveness of material controls from 2026, 50% of companies provided a positive conclusion on the effectiveness of their risk management and internal control systems; 16% included the attestation required by the Sarbanes-Oxley Act on controls over financial reporting; a further 20% provided a negative conclusion, and 14% provided no conclusion.
84% of companies explained in the narrative report the nature and level of assurance obtained over different elements of the reporting.
64% of companies acknowledged the new UK Corporate Governance Code with some discussing the actions they are taking to prepare for the new declaration.
Only 14% of companies referred to developing an Audit & Assurance Policy.
Actions to take:
Take the opportunity to review how your organisation identifies, understands and responds to the risks it faces and determines the risk appetite – is risk appetite articulated clearly for use within the framework and are there clear risk indicators which signal whether risk is being kept within the agreed parameters?
Review disclosures of the control framework – do they explain how the three lines of defence model is operating and is it clear how the board is discharging its oversight responsibilities?
If your organisation included a positive conclusion on the effectiveness of the risk management and internal control systems in the past, before including similar wording in the next annual report, discuss with management what assurance was obtained to support that conclusion to avoid exposing the board to any liability which could arise from shareholders placing reliance on that statement. Consider whether it would be appropriate to refine the wording of any conclusion.
Consider whether there is scope to provide further disclosure on the assurance provided on the key elements of the narrative reporting, e.g., key performance indicators, climate or ESG data etc, such that stakeholders understand the nature and level of that assurance.
Corporate Reporting Insights 2024Diversity & Inclusion:Are companies achieving the targets in the new Listing Rule?
The background to our surveyThe FCA oversees the Listing Rules and introduced a new requirement1 for premium and standard listed companies to provide disclosures on board and leadership diversity for periods commencing on or after 1 April 2022, reflecting the drive for transparency around social issues.Our survey looks at how the first 30 FTSE 350 December 2023 reporters met the new Listing Rule requirements for the first year of mandatory disclosure. We also explore whether the annual reports reflect the transparency society and regulators are looking for around board diversity, executive management diversity and how diversity and inclusion are integrated within the business — for instance whether they are included in disclosures on purpose, culture, values, strategy, succession planning, reward, and board performance review.Last year we conducted a survey to explore whether December 2022 year end reporters were complying early with the new Listing Rule requirements and how their disclosures reflected diversity and inclusion; where we provide a comparator figure this is from those findings.1 Listing Rules LR 9.8.6R(9-11) for premium listed companies and LR 14.3.33R for standard listed companies with a listing of equity shares.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
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.The new Listing Rule statement90% of companies in our sample – all but three – presented the required statement explaining whether they had met the three targets set out in the Listing Rules. Over 80% of companies that provided a statement used the year end, 31 December, as their reference date – this is likely to make it simpler for these companies to achieve consistent disclosure year-on-year.Just over half of companies had met all three Listing Rule targets for their 2023 reports. Of those that hadn't met all the targets, around two-thirds described specific actions they were planning to take to meet targets in the coming year or future years. A handful of companies disclosed more challenging board diversity targets they had set themselves, having met the Listing Rule targets.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. All but one company had produced these tables, with almost all using the correct format.
However, in line with the findings in our 2022 Diversity and Inclusion survey, for those who disclosed the required data, it wasn’t always obvious which of sex or gender identity they had chosen to report on. Half of companies still did not make this clear, with many using the table heading “Reporting on gender identity or sex”. A handful stated they were reporting on “gender identity and sex”. Of those that did seem to be clear on the distinction, 80% reported on gender identity rather than sex, with some of those voluntarily including additional categories such as non-binary in their tables.Almost three out of four companies (73%) explained the approach they had taken to collecting the data used for the purposes of making diversity disclosures at board and executive level – a Listing Rule requirement. However, although all of those companies indicated that self-reporting had been used to gather the data, only six companies clearly described the questions they had posed to the board and executive management.Of the three companies that did not present a statement on whether they had met the Listing Rule targets, two of those explained that their future plans included seeking greater diversity on the board and only one also omitted the numerical tables.In terms of location in the annual report, over half of companies included their statement in the Nomination Committee report, with a third placing it elsewhere in the corporate governance statement. A handful of companies included disclosure in the strategic report or (in the case of the numerical tables) in the directors’ report. Have companies met the Listing Rule targets?Board diversity and inclusion: succession planningDiversity 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 assess their succession planning needs, how they instruct search and recruitment agencies and how accessible they make their appointment process.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.77% of boards – generally nomination committees – discuss the importance for their business of achieving a diverse board when talking about planning for skills and experience at board level. Nomination committees discuss the benefits of board diversity in the broadest sense for improved decision-making, breadth of strategic vision, and understanding global, local or customer context. Some also mention that it is helpful to reflect the make-up of the broader workforce. A handful mention the impact of investor pressure for the board to become more diverse, including through AGM votes.This disclosure does not appear to be driven by any specific regulatory requirement, instead by the "soft pressure" of the FTSE Women Leaders and Parker reviews, which are mentioned by a large majority of companies. In practice it often sits alongside disclosures mandated by the DTR, the UK Corporate Governance Code and now by the Listing Rules.In line with our findings last year, comparatively few companies set out how they make the board 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. This can be a key driver of improved access to diverse candidates, particularly where candidates are neurodivergent or have caring responsibilities.Do succession planning disclosures reflect diversity and inclusion initiatives?Board diversity and inclusion: board performance reviewsOur findings suggest that there are fewer outcomes and fewer actions being set over time with respect to diversity and inclusion at board level. Based on the companies we reviewed, rather than a failing in governance, this seems to reflect ongoing success in embedding diversity and inclusion as a key feature of the board, thus leading to fewer actionable findings in board performance reviews.Many of the actions set out relating to diversity and inclusion for the coming year relate to boards extending their focus to executive management or the business as a whole, rather than the board itself.This year we noted an increasing cohort recognising the skills and experience of individual board members on diversity and inclusion matters, highlighting recent relevant external roles or expertise in board biographies.Do board performance review disclosures reflect diversity and inclusion initiatives?Reporting on how diversity and inclusion is embedded into the businessThe 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 87% explained persuasively why workforce diversity and inclusion was important to the business – although most companies could be more effective at explaining the link between diversity and inclusion and corporate strategy.The overwhelming majority of companies discussed workforce diversity and inclusion in their workforce engagement disclosures this year – 87%, up from 73% in 2022. A handful of companies had newly introduced KPIs regarding diversity and inclusion, with new measures relating to executive management, adding to the more usual KPI regarding the proportion of women in the workforce. Fewer companies felt the need to discuss diversity and inclusion in connection with their values or purpose statement.Almost 90% of companies also discussed diversity and inclusion in the context of training and skills. For the most part this related to training dedicated to bringing on women, Indigenous people, or individuals from an ethnic minority background as future leaders in the business. Some also included the use of their diverse workforce to improve the skill set in the business more widely – for instance through reverse mentoring, or training on how to speak with local customers – with some informative and interesting case studies.The approach used to improve diversity and inclusion varied between companies, but the majority focused on both building from the ground up and external recruitment at more senior levels, with almost all including statements about developing diversity and inclusion throughout the business via culture change and bringing on the existing workforce.Where do companies incorporate disclosure on diversity and inclusion this year?To concludeAlmost all companies are reporting in line with the Listing Rule requirements and have updated their board diversity targets accordingly – with some setting more stretching targets to reflect their commitment to diversity at board and senior leadership levels.For some, diversity and inclusion both at board and workforce level is now "business as usual", leading to less overall disclosure as fewer changes are introduced year on year. Others are finding that regulatory and investor pressure to fully embed diversity and inclusion are leaving them running to catch up.Boards should continue to challenge themselves to monitor company culture and take action where warranted to embed diversity and inclusion more thoroughly. They should evaluate whether diversity and inclusion in the broadest sense are appropriately embedded into their companies’ culture, values, strategy, succession planning, reward, and board performance reviews – and into their annual report.
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
Where the business has set diversity targets for workforce, executive management and the board, disclose and explain those targets and provide annual updates regarding progress and actions
Evaluate the board's existing approach for building diversity and inclusion into succession planning and board performance reviews and consider how to report transparently in this area
Ensure that all elements of the FCA Listing Rule are included and clearly identifiable:
a 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
an explanation of how data has been gathered for the board and executive management
Corporate Reporting Insights 2024Climate Transition Plan Disclosures:Now and future
The background to our surveyTransition 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 plan 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 UK government has expressed its intention to make UK-endorsed ISSB standards available in 2025. IFRS S2 Climate-related Disclosures – one of the ISSB standards – includes requirements for companies to report on their plans to transition to a low carbon economy. The ISSB has also recently announced that it is assuming responsibility for the UK’s Transition Plan Taskforce (TPT)’s disclosure framework and related guidance. The UK Government established the TPT as part of the delivery of the UK Government’s Roadmap for its strategy to green the financial system, and in particular the Sustainability Disclosure Requirements. As a strong supporter of the TPT, the UK FCA encourages listed companies to consider the TPT disclosure framework and related guidance.As the UK Government consults on making ISSB standards available for use in the UK and the FCA consults on bringing these into the disclosure requirements for UK listed companies, the focus on high quality transition plans disclosures is likely to remain. Our survey of annual reports1 looks at the first 50 annual reports issued by FTSE 100 reporters in 2024 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. 1 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 definitionA 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)The Transition Plan Taskforce 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 were published in Autumn 2023. In June 2024, the IFRS Foundation announced that it is assuming responsibility for the TPT’s disclosure framework and related guidance. In the immediate term, the IFRS Foundation will host the TPT’s disclosure materials on its Sustainability Knowledge Hub. In the near-term, it intends to use the TPT disclosure-specific materials to develop educational materials to support users and preparers of transition plans disclosed under IFRS S2. In the longer-term, the ISSB will consider the need to enhance the application guidance within IFRS S2. In doing so, the ISSB will leverage the TPT-informed educational materials to update the formal guidance. Any respective changes to the IFRS S2, however, would be subject to the IFRS Foundation’s due process. Reporting against the TCFD guidanceClimate-related targetsAll companies disclosed one or more climate-related targets, up from 98% in 2022. We anticipated an increase in the number of companies that included some or all of their Scope 3 emissions - which often form the majority of an organisation's total emissions - in their GHG-related targets, however there had been no change since last year, at 88% of companies.In line with the TCFD’s recommended disclosures:
All companies disclosed the timeframe over which all the targets apply (92% in 2022)
98% of companies disclosed the base year from which progress is measured (98% in 2022)
94% of companies clearly identified if the target was absolute or intensity based (90% in 2022)
Section C of the TCFD’s 2021 Guidance for All Sectors includes the following recommendation relevant to transition plans: Strategy: Organizations that have made GHG emissions reduction commitments, operate in jurisdictions that have made such commitments, or have agreed to meet investor expectations regarding GHG emissions reductions should describe their plans for transitioning to a low-carbon economy, which could include GHG emissions targets and specific activities intended to reduce GHG emissions in their operations and value chain or to otherwise support the transition.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. *The objective of an absolute target is to reduce absolute emissions over time. The objective of an intensity target is to reduce the ratio of emissions related to a business metric over time, for example, emissions to revenue. Interim targetsThe 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’.Of the companies disclosing climate-related targets:
84% of companies had one or more interim target before 2030 (82% in 2022)
88% of companies had set 2030 as an interim target (up from 61% in 2022)
86% of companies had a long-term target of 2040 and above, with 26% also disclosing interim targets after 2030 (80% and 10% respectively in 2022)
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. It is therefore encouraging to see the year on year increases in companies setting long-term targets and 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 plans60% of companies included disclosures that were identifiable as plans to transition to a low carbon economy i.e., disclosures on targets and actions to support their transition toward a low-carbon economy. An additional 34% 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. These findings are broadly consistent with 2022 data, indicating no overall improvement in the number of companies disclosing information on transition plans. Consistent with 2022, 96% of companies referred to board level responsibilities for overseeing of the companies’ response to climate change. However, over half of companies now specifically referenced a transition plan as part of these responsibilities (58% compared to 25% in 2022). Identifying transition plan disclosures continued to be 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 what is included in any additional content. Other reports referred to included separate TCFD reports, sustainability reports and transition plan reports
Did the companies disclose information on transition plans?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 future developments TPTGiven that the IFRS Foundation is assuming responsibility for the TPT Disclosure Framework and the FCA are already encouraging listed companies to consider the TPT Disclosure Framework and related guidance, it was encouraging to see that 22% of companies stated that they had considered either the proposed or finalised TPT Disclosure Framework when preparing their 2023 disclosures compared with 6% in 2022. An additional 18% stated that they intend to produce TPT aligned disclosures going forward (up from 12% in 2022). Of the companies that stated they prepared their disclosures in accordance with the TPT Disclosure Framework:
Just over two-thirds provided helpful signposting by using the five disclosure elements of the framework as sub-headings or by providing a table to indicate where the disclosures could be located.
The quality of transition plan disclosures was generally better compared to companies who did not reference the TPT Disclosure Framework,, with only one of the companies rated as having provided ‘some but limited information’ about their plans to transition to a lower carbon economy.
A key recommendation of the TPT Framework is that organisations publish a standalone transition plan. 34% of companies in the survey cross-referred from the annual report to a separate report described as a standalone transition plan (up from 20% in 2022). Another 10% of companies stated their commitment to publishing a separate transition plan in 2024 or 2025. However, two 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. The UK Government established the TPT as part of the delivery of the UK Government’s Roadmap for its strategy to green the financial system, and in particular the Sustainability Disclosure Requirements. As a strong supporter of the TPT, the UK FCA encourages listed companies to consider the TPT disclosure framework and related guidance. As the UK Government consults on making ISSB standards available for use in the UK and the FCA consults on bringing these into the disclosure requirements for UK listed companies, the focus on high quality transition plans disclosures is likely to remain. It is anticipated that the UK Governments will make UK-endorsed ISSB standards available in 2025. In 2023, the ISSB published its first two standards:
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. The IFRS Foundation is assuming responsibility for the TPT Disclosure Framework and related guidance. In the near-term, it intends to use the TPT disclosure-specific materials to develop educational materials to support users and preparers of transition plans disclosed under IFRS S2. In the longer-term, the ISSB will consider the need to enhance the application guidance within IFRS S2. In doing so, the ISSB intends to leverage the TPT-informed educational materials to update the formal guidance. Did the company reference the UK's Transition Plan Taskforce in the Annual ReportHow ready are companies for transition plan disclosures under IFRS S2 Climate-related
Disclosures?50% of companies made some reference to the work of the ISSB, compared with 32% in 2022.
The most common type of reference we identified was an explanation that the board was monitoring developments and / or that the board was considering how to align disclosures to the ISSB’s 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, 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, including the two areas set out below. Validity of targetsIFRS 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
Consistent with 2022, 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
54% of companies disclosed that their targets had been verified by a third party, compared with 44% in 2022. 22% 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 one case, the third party referenced was the Science Based Target Initiative (SBTI). The other company referred to an independent assessment by the Transition Plan Initiative (TPI).
Any revisions to the target and an explanation for those revisions
30% disclosed that targets had been revised during the year, compared to 22% in 2022. In most cases, an explanation was provided with many companies explaining that the revisions were the result of the availability of new or more relevant information to assist in target setting. Other companies stated that they had successfully achieved their short-term targets and/or had set new or improved long-term targets to match their progress.
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. 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).12% of companies stated that they did not use carbon offsets or intend to use carbon offsets to meet their climate-related targets (up from 6% in 2022). 52% of companies referred to using carbon offsets (down from 64% in 2022). Just under a half of these companies provided some 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 or an acknowledgement that any residual emissions would need to be offset. For 36% 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. 36. For each greenhouse gas emissions target disclosed in accordance with paragraphs 33–35, an entity shall disclose: (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 technliogical carbon removals, and whether the underlying offset is achievedthrough 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).Does the company use, or intend to use, carbon offsets? Transition plan disclosuresConsistent with TCFD, IFRS S2 requires an entity to disclose its plans to transition to a lower carbon economy and, specifically, how it will achieve both 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 states 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.14 (a) Specifically, the entity shall disclose information about:(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:(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 concludeFor 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 UK’s Transition Plan Taskforce’s (TPT) framework, and the ISSB’s announcement that it is assuming responsibility for the TPT disclosure framework and related guidance, 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 a robust transition plan. Boards should also take the opportunity to evaluate the ISSB’s Climate Standard, IFRS S2, and the TPT Disclosure Framework to understand where further disclosures may be required.
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
Evaluate the ISSB’s Climate Standard (IFRS S2) and the TPT Disclosure Framework to identify any gaps with future requirements and opportunities to enhance current disclosures
Provide clear signposting and cross-referencing to transition plan disclosures
Use clearly defined and consistent terminology to describe transition plan information
The background to our surveyThe UK Corporate Governance Code has, for a number of years, placed a responsibility on boards to establish a framework of prudent and effective controls, which enable risk to be assessed and managed 1. In addition, the Code says that the board should establish procedures to manage risk, oversee the internal control framework, and determine the nature and extent of the principal risks the company is willing to take in order to achieve its long-term strategic objectives 2. As part of the Government’s ‘Restoring trust in corporate governance and audit’ reform agenda, the board’s role in effective risk management and internal control has come under scrutiny. With some suggesting that the UK needed a more robust approach for holding boards to account in this area.The reform process has resulted in a revision to the UK Corporate Governance Code which will, from periods commencing on or after 1 January 2026, require greater transparency not only on how the board discharges these responsibilities but also whether they can confirm that the organisation’s material controls are operating effectively at the balance sheet date.In preparation for this new Code requirement, many companies are revisiting their disclosures on risk management and internal control and also considering the sources of assurance provided to the board to give them comfort that those systems are operating effectively.Our survey looks at how 50 FTSE 350 December 2023 reporters have explained their approach to controls and assurance and demonstrated how their boards are discharging their responsibility to monitor their company’s risk management and internal controls and, at least annually, carry out a review of their effectiveness.1Principle C UK Corporate Governance Code 2018 2Principle O UK Corporate Governance Code 2018 How risk appetite is used in risk managementAs noted above the Code states that boards should determine the nature and extent of the principal risks the company is willing to take to achieve its long-term strategic objectives, in other words, the company’s risk appetite. Further, when considering the effectiveness of an internal control framework, a key objective is to establish whether the exercise of risk management throughout the organisation is consistent with that appetite, which needs to remain within the outer boundaries of the risk tolerance. This means that clarity of thinking on risk appetite (and risk tolerance) is a core consideration for effective risk management. But how transparent is this thinking in current annual reports?
88% of companies included reference to risk appetite in the strategic report but there was significant variation in the depth and quality of the information provided. Disclosure ranged from a very brief reference to the concept of risk appetite through to more comprehensive disclosure on how risk appetite is used within the risk management and internal control framework. These disclosures explained factors that affected the organisation’s risk appetite, and approach to risk, e.g., seek, accept, manage, avoid. Some disclosures made it clear how the different approaches are used depending on the nature of the risk and how risk indicators and/or metrics are monitored through internal assurance processes and reported to the board. Example disclosures which include the elements described above: Ocado (p105 2023 ARA), Convatec (p76 2023 ARA), Glencore (p108 2023 ARA)Describing the control frameworkInternal controls are an important element of the framework of risk management. As with risk appetite, we found that there was significant variance in the level of transparency on the internal control framework and monitoring and review of its effectiveness to support risk management.The three lines of defence framework is widely acknowledged and understood by a range of industries as the governance model for risk. It is intended to delineate risk management roles across an organisation, improving clarity, accountability and effectiveness. When describing their control framework, only 44% of companies explained clearly how the three lines of defence model operated within their organisation with just under half of those being from financial services. As companies work towards the new material controls declaration, understanding the organisation’s internal control framework will be key both for the board and stakeholders.Example disclosures which include the elements described above:
Anglo American (p59 2023 ARA), Entain (p82 2023 ARA), IMI (p88 2023 ARA)
First Line of Defence Operational management, which handles day-to-day ownership and management of risks and controls.Second Line of DefenceInternal monitoring and oversight functions, including risk management and compliance.Third Line of Defence
Internal audit, which provides independent assurance and evaluation of risk management processes.
The board’s oversight roleA key driver for the latest update to the UK Corporate Governance Code to require a board declaration on the effectiveness of the material controls was a perceived lack of transparency of how boards are exercising their monitoring and review responsibilities. This is demonstrated through the new Code Provision 29 which explicitly, in addition to the declaration on material controls, calls for “a description of how the board has monitored and reviewed the effectiveness of the [risk management and internal control] framework”.Our review found that the description of the board’s oversight of the risk management and internal control framework did not always make it clear which controls had been covered by the board’s monitoring and review activities, with oversight of non-financial reporting controls being particularly unclear.Given the importance of the oversight over the design and maintenance of the effectiveness of the risk management and internal control framework within a board’s range of activities, we reviewed governance statements to determine whether this was identified as a topic for the annual board performance review. Only 32% of companies had included risk and control within their performance review disclosures. The increased focus on board oversight of risk management and internal control in the 2024 Code has prompted early consideration by boards. 64% of companies acknowledged the new UK Corporate Governance Code and discussed actions they are taking to prepare for the new declaration, although only 6% referenced making changes to the audit committee’s terms of reference to reflect refreshed and/or enhanced approaches to risk management and internal control.
Control type
Clearly identified as part of the monitoring and review activities
Operational
68%
Compliance
66%
Financial
78%
Financial reporting
64%
Non-financial reporting
30%
Explaining the outcome of the board’s oversight activityThe 2018 Code does not include an explicit requirement for boards to set out a conclusion on the effectiveness of the risk management and internal control framework. The wording included in the current Code Provision 29 is that boards should “report on [their review of the risk management and internal control systems] in the annual report” and this been subject to a wide range of interpretations.Notwithstanding that lack of a specific requirement, 50% of companies provided a positive conclusion on the effectiveness of their risk management and internal control systems, 16% included the attestation required by the Sarbanes-Oxley Act on controls over financial reporting, a further 20% provided a negative conclusion, and 14% provided no conclusion.The majority of those positive conclusions confirmed the effectiveness of the whole risk management and internal control system but with limited explanation of what support the board obtained for the conclusion. Given potential liabilities under the Companies Act and the Financial Services and Markets Act for misleading statements, boards should exercise caution when making statements confirming effectiveness. With the new Code Provision 29 declaration, it is likely that there will be an increase in expectations for boards to demonstrate rigour and the basis for their statement on effectiveness.AssuranceIn October 2023 the Government withdrew regulations which would have required companies to develop an Audit & Assurance Policy. A clear policy would have provided transparency of the decisions boards make in relation to the assurance obtained over their narrative reporting. In the absence of this requirement, it is positive to note that 84% of companies included disclosure in the narrative report which indicated and/or explained the nature and level of assurance obtained over different elements of the front half reporting. 14% of companies referred to continuing to develop an Audit & Assurance Policy.Some companies used icons or symbols to indicate metrics which have been subject to external assurance, with a cross reference to further information on the nature of the assurance, the provider and the assurance report. Others used footnotes to provide similar information.Companies which include the techniques noted above: Astra Zeneca (2023 ARA), Barclays (2023 ARA), BAE Systems (2023 ARA)To concludeThe changes made to the 2024 Code will act as a catalyst for boards to review their approach to risk management and internal control in order to get ready to make the declaration on the effectiveness of material controls in their 2026 annual reports.In advance of the formal declaration, organisations should aim to improve the level of transparency over the risk management process, the board’s oversight role and the nature and level of assurance obtained. This should help improve stakeholders’ confidence that the board is discharging its responsibilities under the Code effectively.The FRC’s Corporate Governance Code Guidance is helpful in understanding what is expected from these processes and oversight activities.
Take the opportunity to review how your organisation identifies, understands and responds to the risks it faces and determines the risk appetite – is risk appetite articulated clearly for use within the framework and are there clear risk indicators which signal whether risk is being kept within the agreed parameters?
Review disclosures of the control framework – do they explain how the three lines of defence model is operating and is it clear how the board is discharging its oversight responsibilities?
Consider whether there is scope to provide further disclosure on the assurance provided on the key elements of the narrative reporting, e.g., key performance indicators, climate or ESG data etc, such that stakeholders understand the nature and level of that assurance.
Get in touch
Veronica PooleGlobal IFRS Leader, NSE Head of Accounting and Corporate Reporting
