Common pitfalls in climate reporting

Many large UK entities are now mandated to make climate-related disclosures in their annual report either for those applying the FCA Listing rules, in accordance with the Task Force on Climate-Related Financial Disclosures (TCFD) or, for a broader group of large entities, the Climate-related Financial Disclosure Regulations. Both frameworks require preparers to report on climate in line with four main pillars:

Governance
Strategy
Risk Management
Metrics and Targets

In this article, we outline some of the common reporting pitfalls we have identified in annual reports and those identified by regulators.

Common Pitfalls

Pitfall 1: Governance

Many entities have been providing governance disclosures for several years in line with corporate governance and other regulatory requirements. There can, therefore, be an overreliance on existing governance reporting to meet climate reporting obligations. This results in vague and unspecific narratives regarding how climate-related risks are monitored and the process and frequency by which the board is informed about climate-related issues. Preparers are reminded that the TCFD guidance for all sectors includes detailed requirements on disclosures that should be provided in respect of governance, such as:

Whether the board and/or board committees consider climate-related issues when reviewing and guiding strategy, major plans of action, risk management policies, annual budgets, and business plans as well as setting the organisation’s performance objectives, monitoring implementation and performance, and overseeing major capital expenditures, acquisitions, and divestitures
The processes and frequency by which the board and/or board committees (e.g. audit, risk, or other committees) are informed about climate-related issues and
How the board monitors and oversees progress against goals and targets for addressing climate-related issues.

Pitfall 2: Compliance statements

The FCA listing rules require TCFD disclosures to be provided on a comply or explain basis and a detailed compliance statement to be disclosed.

Compliance statements are sometimes missing or are not sufficiently specific to explain which disclosures have been omitted and what steps are being taken to address these missing/incomplete disclosures.

In addition, compliance statements are sometimes ambiguous and fail to achieve their purpose of providing clarity on whether compliance with FCA listing rules has been achieved, i.e. references to 'supporting TCFD disclosures' or ‘disclosures in line with TCFD disclosures’. In feedback provided by the FCA, they pointed out that if the entity's annual report does not include a compliance statement, then entities should not be using language such as 'aligned' or 'supported' and reminded entities that if they do not comply with the requirements then an explanation as to ‘why’ should be given under the 'comply or explain' principle.

The FCA also noted that the assessment of own compliance was sometimes inadequate, particularly when disclosures are limited in content. Where this was the case, the FCA requested companies to provide additional information as part of their reviews to assess compliance, ie:

A reconciliation of the compliance statement to the disclosures provided
Full details (with supporting documents) on the process of preparation and assessment of compliance and
Full details on the steps the company is taking to be able to comply.

Entities can consider performing such procedures internally to assess the adequacy of compliance statements made.

Pitfall 3: Metrics and Targets

Disclosures around metrics and targets are a key regulatory focus area. Disclosures on Scope 3 emissions can be limited and climate targets and/or net zero commitments can be poorly articulated. It can sometimes be unclear how terms like ‘net zero’ or ‘carbon neutral’ are being used, with no clear description of the plans to achieve such targets.

The FCA found that the most common reporting gaps were in respect of the more quantitative elements of the TCFD’s recommendations, e.g. scenario analysis and metrics and targets. The FCA does, however, acknowledge that metrics and targets were likely to be among the most challenging for entities, given their reliance on access to data and investment in modelling or analytical capabilities.

Pitfall 4: Sector Specific Guidance

The FCA Listing Rules require entities to comply with the main recommendations of the TCFD which are the 11 recommendations under the 4 pillars, as well as the TCFD Annex which provides detailed practical guidance on how entities should implement the TCFD recommendations. The Annex includes guidance which applies to all sectors as well as supplemental guidance for the financial sector and other non-financial sectors such as energy, transportation, materials and building and agriculture including food and forest products.

It can appear that the sector-specific guidance has not been fully considered in preparing the disclosures, resulting in disclosures that are not well articulated or sufficiently detailed and specific.

Pitfall 5: Strategy

Consistent with pitfall four, the sector-specific guidance is sometimes not fully reflected in disclosures relating to strategy.

In addition, disclosures on climate-related opportunities can be particularly limited.

Example disclosures that can be improved by reference to the sector-specific guidance include:

How resilient the entity’s strategy is to the identified climate risks
Consideration of the impact of climate-related risks and opportunities on its supply chains and/or value chain and
The impact of climate-related issues on the financial performance and position of the entity.

Looking forward

While these are just some of the common pitfalls identified in climate reporting to date, we remind preparers that climate reporting has been noted by the Financial Reporting Council (FRC) and other global regulators as being an area of focus for the 24/25 reporting period. In particular, the FRC noted that it will focus on metrics and target disclosures and whether companies have adequately addressed net zero commitments in their financial statements. Similarly, we expect investor expectations on the quality of climate reporting to increase year on year.

You can read more about common findings on climate reporting here:

If you would like to discuss any of these areas in further detail or would like to have a wider conversation, please get in touch with Anthony Appleton.