FRC: ‘More holistic’ view on ESG reporting needed by UK companies

UK businesses can better navigate the complex ESG reporting landscape by understanding their own materiality and the needs of their stakeholders, according to Mark Babington, executive director of regulatory standards at the Financial Reporting Council (FRC).

Speaking during an FRC panel discussion on Wednesday, Babington argued that a deeper comprehension of how financial and non-financial metrics impact one another is a crucial stepping stone in producing valuable, actionable information.

“One of the things that’s very clear, is that when you read the narrative that companies set out in their annual reports, they are communicating the impact of their business, be it on people, communities, or on the planet.

“But these disclosures have financial implications as well. And the challenge for reporters now is how you integrate this information.”

Babington urged companies to “think more holistically” about financial and non-financial metrics, noting that this will allow them to produce “decision-useful” information for stakeholders.

“The most important thing is to approach this through a lens of ‘what is material to my entity?’ All companies are very different, and so are the needs of the users, so materiality is critical.”

A similar point was made by Janet Lucke, senior case officer in the FRC’s corporate reporting review unit. Companies must “pick their battles” when it comes to ESG reporting and avoid trying to do it all at once, she said.

“There’s obviously some things that are compulsory, but beyond that, pick something to do well, rather than trying to do a little bit of everything.”

Lucke also advised companies to disclose the areas in which they are less confident and equipped, as opposed to trying to “gloss over” it.

“We would far rather that companies explain quite clearly what they are and aren’t able to do. We don’t expect everyone to have perfect information right from the get-go.”

’We don’t want a two-tier market’

A more tailored, considered approach will avoid a splintered market dynamic, whereby smaller entities view ESG merely as an obligation rather than an opportunity to optimise reporting practices, Babington added.

“One of the things that we’re really concerned about is a two-tier market. We don’t want a situation where the largest, most sophisticated companies are resourced in a way that allows them to develop that situation, and others look at it almost as a compliance exercise.”

Lucke concurred, noting that companies must learn to “tell their story” through these new reporting requirements.

“At the moment, we’re seeing a lot companies taking a fairly checklist approach. We’re really hoping that as people get used to them [new standards], they’ll have a bit more confidence to talk about what’s genuinely important to the business.”

‘Fast-developing’ reporting standards

ESG reporting standards in the UK have developed significantly in the past two years, with the emergence of several crucially important developments.

Most notably, November 2021 saw the formation of the International Sustainability Standards Board (ISSB). This was accompanied by the publication of prototype climate and general disclosure requirements, the final versions of which are expected to be published in 2022.

Furthermore, in October 2021, the UK announced that it was to become the first G20 nation to mandate climate-related disclosures for its largest businesses.

The disclosures were produced in line with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations, with the new rules coming into force in April 2022.

However, questions remain as to how the varying sets of standards will become comparable across different regions. For Babington, this is a matter of critical importance, particularly for multi-national organisations.

“It’s in the interest of UK business for us [the FRC] to be able to sign up to these global frameworks,” he said. “Capital is international – it’s really important that a company reporting can meet its obligations in multiple jurisdictions.”

Sarah-Jayne Dominic, head of policy, programmes and strategy at the FRC, reiterated this point, stressing the crucial nature of a global reporting baseline.

“[Standards] have to be made effective within each jurisdiction. There is a hope and an expectation that we will have a global baseline for primary users of reports.”

Babington concluded by urging businesses and their advisors to communicate with the standard-setting bodies and push for clearer and higher-quality guidance.

“This is a really fast-developing landscape, but it’s your opportunity to be able to ensure that it develops in a way that meets your needs.

“We need you to join us in emphasising the importance of consistent, high-quality reporting.”