17 April 2023
On Friday 31 March, the FRC released a joint statement with the FCA welcoming the updated Green Finance Strategy and recognition of their role in respect of climate and environmental objectives. This comes as the FRC has expanded on their outlook in respect of ESG for 2023. The FRC has also published a 2023 Environmental Social and Governance Update, which builds on their 2021 Statement of Intent identifying challenges to the production, audit and assurance, distribution, consumption, supervision and regulation of ESG information.
We identify here some of the key guidance for the accountancy sector produced over the last year and further developments expected from the FRC following their ESG update. It is clear from the FRC's continued proactive engagement in this area that this will be an important area of focus for the FRC, and those responsible for preparing and reviewing financial statements should expect ESG reporting and TCFD disclosures to be closely scrutinised.
In the last year, the FRC has progressed several projects, as reported in the Updated Statement of Intent, and produced a number of guides, best practice examples and thematic reports in respect of ESG reporting and disclosure. The FRC's Annual Enforcement Review of July 2022 also focussed on climate risk as an area of interest for the enforcement team, in particular:
The FRC's thematic review considered the disclosures of 25 large companies impacted by climate change and required to make TCFD disclosures in line with the FCA Listing Rule. Although the FRC noted significant improvements to the TCFD disclosures and climate reporting in the entities' financial statements, they also found that:
In respect of the accounts work regarding climate change reporting, the FRC have previously noted that:
Appendix 2 of the Thematic Review of TCFD disclosures outlines further the FRC's expectations across listing rule requirements, TCFD recommendations, narrative reporting, and financial statements for climate change and ESG reporting. This may be helpful guidance to teams going forward.
The FRC note on "What makes a good annual report and accounts" also contains several suggestions for companies to improve climate-related reporting, which focuses on the quality of narrative statements and materiality assessment.
Consideration should be given to both the effectiveness of the controls and the level of assurance required over such information to ensure the accuracy of the statements.
Building on the guidance produced last year, the FRC has announced that in 2023, their areas of focus will include:
IAASB and IESBA standard setting - The FRC will continue projects with the International Audit and Assurance Standards Board (IAASB) and International Ethics Standards Board for accountants (IESBA) to develop international ethical, independence and assurance standards consistent with ESG reporting and assurance.
Another TCFD thematic review – the FRC will conduct a further thematic report which will include disclosures and climate reporting as part of its work to develop a framework for developing and reporting climate change. As part of this review, the FRC will also consider how adequately these companies’ address net zero commitments in their financial statements.
An AQR focus on climate-related risk.
Updated guidance for FRS 102 preparers - which will focus on the ESG matters that affect a company's financial position and the risks.
Strategic report and materiality disclosures – the FRC will produce further guidance on the strategic report (in addition to their 2022 ESG updates) and are currently reviewing materiality to consider "enhancements to the materiality process" and the factors contributing to climate-related disclosures.
Overall, ESG reporting and assurance will continue to be an area of significant supervisory focus for the FRC over the next few years, and that will include significant consultation in respect of standard setting and publication of guidance.