The Financial Reporting Council (FRC) believe materiality is essential to creating a “cohesive package” of ESG-related information for company reports.
This is what the regulator stated today, commenting on its updated its statement of intent on ESG. The document was first published in 2021 and outlines the key issues within ESG reporting.
Speaking at the 2023 FRC ESG webinar, Mark Babington, executive director of regulatory standards at the FRC, says he is pleased with the work regarding materiality in the context of company reporting.
“If we can work with companies to help them be more discriminating about material issues that need to be reported, this will help to avoid these doorstop annual reports, and actually focus on providing the information that users want” says Babington.
A big challenge for firms is that they are now being asked to produce vast amounts of information. Babington says companies must find a balance between providing information stakeholders need and providing it in a way that is “decision ready and decision useful.”
“It’s not a case of can we stick another 50 pages on your annual report, it’s how do we bring all of this information together in a cohesive package,” he notes.
Also at the webinar, Josephine Jackson, director of audit policy at the FRC, spoke of the “significant investor interest” in reporting key social and governance issues.
Jackson says, “you can’t really view them any more as fringe issues from financial returns, but now they’re really recognised as financial material and mainstream business concerns.”
Firms working on quantitative and qualitative disclosures for its financial reports, Jackson asks “is it all cohesive, does it all work together, and these materiality considerations are important too.”
The FRC is now focused on how to strengthen ESG data and how to build governance around it as ESG information is “less mature and not as well developed”, according to Babington
Stakeholders are now very clear that they want “reliable information” says Babington, therefore you need a route to provide high-quality assurance.
The International Audit Assurance Standards Board is developing an international assurance standard, and they are “fast-tracked to do that” says Jackson.
Jackson believes a global assurance standard like this will instil trust in the UK public that the company information reported is factual irrespective of where the organisation is based.
In 2022 the FRC established the FRC ESG Group, an advisory body that provides cross-FRC thinking and response to ESG challenges. This group allows the FRC to respond quickly and more effectively to meet stakeholder needs.
FRC and the ISSB
The ISSB, founded in 2021, is looking to finalise a global baseline for sustainability standards in 2023 as firms around the globe face varying frameworks, standards, and regulatory disclosure requirements.
The FRC has previously provided comprehensive responses to the ISSB’s first two exposure drafts, and Babington says the FRC is a “major supporter” of its sustainability work.
Recently, the ISSB voted to include an exemption in IFRS S1 that in certain circumstances, will allow entities to exclude commercially sensitive information from its sustainability disclosures. This exemption will only apply to sustainability-related opportunities.
Reacting to the exemption, Babington says it is more of reflection of the fact that sometimes there is a “high bar” that you have to be able to pass to be able to report on opportunities.
“a lot of issues around climate risk, are quite often related to downside, so the impairment of assets or the increase of liabilities to provide for costs. However, if you’re going to recognise a potential benefit, you have to have a greater degree of certainty over that,” he adds.