Establishing a strong link between financial and sustainability reporting is crucial for maintaining completeness of information and the usefulness of disclosures to stakeholders. This interconnectedness fosters transparency and provides a holistic understanding of a company’s performance and commitment to sustainable practices.
Following our latest research dive, this blog shares our insights from reviewing how companies are addressing sustainability within their financial statements. Luminous examined a sample of 20 UK-listed companies with reporting year ends in 2023. For clarity, we specifically reviewed for climate-related disclosures in the context of sustainability.
Please be advised that the page references included refer to our research deck. If you would like to obtain this deck, please fill out the request form at the bottom of this page and we will be in touch.
Basis of preparation
We found the majority of the sampled companies referenced climate in the financial statements, with only two companies that made no explicit reference or acknowledgement of climate-related matters in the entirety of their financial statements. While it is encouraging to find the majority acknowledged climate-related matters, the depth companies went into varied significantly, with the majority providing very high-level disclosures which were mostly boilerplate.
Among the noteworthy observations, some companies stood out for their financial statement climate consideration disclosures in the basis of preparation notes. Next (page 28) presented concise, clear and accessible disclosures which summarised and listed its climate considerations within its financial statement items.
The cross-referencing to the climate change assessment in the Strategic Report strengthened the connection between the front and back ends. Similarly, British Land (page 6) offered a detailed overview which included quantitative financial information and provided exact financial statement note numbers for further details. The inclusion of references to the Strategic Report further solidified the link between both ends.
An exceptional finding was observed by Compass Group (page 10), which introduced iconography across its financial statements to highlight climate-related matters. This simple design tool serves as a key for readers, offering a clear and efficient means of navigation. Such initiatives contribute to fostering transparency and facilitating a better understanding of how climate change impacts a company financially.
Front- to back-end connections
As previously highlighted, references to the Strategic Report in the financial statements help to reinforce the link between the front and back end of the Annual Report. Despite this seemingly trivial point, these references are, in fact, quite encouraging.
This becomes particularly significant for users who prefer to read annual reports starting from the back end before exploring the front end. Our conversations with investors have revealed that some adopt this ‘back to front’ reading approach, beginning with the financial statements.
Companies with more useful disclosures go beyond simple references; they provide meaningful page citations that not only support readers in understanding the financial statement notes but also contribute to a more holistic view of the business.
Instead of a broad page drive to the entire Strategic Report, companies can improve the reader’s experience by offering precise page references to specific areas of focus for enhanced context. For instance, Britvic’s (page 8) financial statement notes regarding impairment testing highlighted that the unmitigated effects of the “Stated government policy pathway” would reduce its recoverable amount by £6.3m and directed readers to the specific page in the TCFD disclosures that provided further details on this pathway.
Britvic stands out as one of the few companies that have quantified climate-related information in their financial statements, a noteworthy effort in providing stakeholders with tangible and specific data.
Acknowledging the ‘F’ in TCFD
Perhaps unsurprisingly, consistency between the front end and back end is a challenge for many companies, particularly as the Strategic Report, including the TCFD disclosures, is typically reported by a different set of preparers to the back end.
The challenge remains in bridging this gap but nonetheless we were encouraged to find an increase in references to TCFD in the financial statements and, reciprocally, financial statements in the TCFD disclosures. However, we found the financial information reported in the TCFD disclosures challenging to understand in the context of its relevance to the financial statements.
While we appreciate that TCFD disclosures are predominantly forward-looking, especially in scenario analysis, and financial statements are backward-looking, ensuring alignment and consistency in the narrative between these disclosures is key to producing an informative and transparent annual report, with consistent messaging.
We particularly liked Barratt Developments’ (pages 4–5) TCFD approach; not only were its potential financial statement impacts quantified, but it also provided a dedicated page offering a clear overview of each financial statement item affected by climate change, directly referencing the relevant financial statement notes and page numbers.
Additionally, it included a visual chart illustrating its estimates of the potential unmitigated variance to profit before tax under each climate scenario compared with the “Stated Policies” baseline. This approach is encouraged as it enhances comprehension and sets up a clear navigable link to the back end.
We also liked SSE (page 32), which initiated its TCFD disclosures by explicitly acknowledging the ‘F’ of the TCFD requirements. Furthermore, in note 4 to the financial statements, SSE (page 33) provided detailed information on financial judgments and estimation uncertainties related to climate change.
Specifically, in both SSE’s TCFD disclosure (climate transition risks) and financial statements, the potential closure of unabated gas generation due to aggressive climate policies is acknowledged. The TCFD disclosure discusses the impact on SSE’s existing gas and oil generation fleet, nearing the end of its life by the late 2020s, aligning with the financial statements (valuation of property, plant and equipment and impairment assessment of goodwill), which detail the majority of the GB combined cycle gas turbine (CCGT) fleet nearing its economic life’s end.
The narrative, involving repurposing assets and developing low-carbon technologies, is consistently emphasised in both disclosures and demonstrates alignment in reporting.
Best-practice tips:
- Provide clear and accessible details of climate change considerations within the financial statements notes in the basis of preparation disclosures.
- Ensure effective use of cross-referencing between the Strategic Report and the financial statements to provide users with more context and a holistic picture of the business.
- Disclose both the current impact of climate change on your financial performance and the potential impact on your financial planning in the short, medium and long term and clearly distinguish between them.
- Try to quantify the financial impact of climate change, including by disclosing a range if providing a number is difficult.
- Familiarise yourself with the disclosure requirements for the financial impact of climate change under IFRS S2 (and CSRD, if you are in scope) as these are more onerous than those of TCFD.
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