A notable trend we noticed is the increased use of materiality assessments, making ESG strategies easier to understand for readers of the annual report. The majority of reports we reviewed included a clearly defined ESG strategy built around commitments which were described as material.
These were also increasingly integrated into the corporate strategy, which included ESG aspects, if not an ESG pillar, or was underpinned by the ESG strategy in over three-quarters of reports. Climate change and net zero were key focus areas, no doubt helped by TCFD and the mandatory standards being developed by the Transition Plan Taskforce (TPT) for climate transition plans of UK companies.
All companies in our sample identified climate change as a risk and over three-quarters as a principal risk, although two mentioned it only in their TCFD disclosures. Most also differentiated between physical and transition risks. However, climate-related opportunities continued to be less well documented than risks with only one-third providing detailed disclosures, one-quarter mentioning them only in their TCFD disclosures and one company not identifying any opportunities at all.
Likewise, in the second year of mandatory TCFD reporting, half of the companies in our sample did not quantify the impact of climate change on their financial planning, even if they did so in their publicly available CDP response and three companies did not mention financial impacts at all. Companies should remember that TCFD is asking them to consider the impacts of climate-related risks and opportunities on their strategy and financial planning over different time horizons – not just on the current year’s financial statements, where it is often judged to be immaterial. Investors, too, expect to see financial impacts sufficiently explained and may vote against the annual report, financial statements or reappointment of the NEDs responsible if they are not satisfied with the disclosure.
Conversely, accountability for delivering climate-related commitments was well disclosed with an increasing number of reports featuring ESG Committee reports or similar in the Governance Report. Given the proposed updates to the UK Corporate Governance Code, we also expect to see ESG increasingly discussed in the Audit Committee report.
All companies in our sample reported their Scope 3 emissions or were preparing to do so and two considered Scope 4 reporting due to growing interest, with one presenting a case study detailing how its products help customers avoid emissions.
Most of the reports we reviewed mentioned net-zero transition plans with targets, the majority of them science based. However, while most reports included at least a summary of how the company intends to achieve these targets, almost one-third did not and one company did not disclose any targets. None had decided to report early against the TPT framework, which is substantially more complex than most current transition plan reporting.
In this context it is interesting that we observed a trend towards shifting detailed disclosure of TCFD and transition plans into separate publications. We understand that companies are concerned about page count, but would remind them that time-poor investors view the annual report as a company’s shop window and principal research report, ahead of sell-side research, and that information which is material – that is, decision-useful for investors – should be included in the Strategic Report.
With TPT set to become mandatory and ISSB S2 likely to replace TCFD, the consideration of what constitutes material information will become ever more important for companies seeking to strike a balance between satisfying regulatory requirements and keeping reporting both manageable and user friendly.
The imminent launch of the Taskforce on Nature-related Financial Disclosures (TNFD) framework will only exacerbate this issue. As the name suggests, TNFD is closely modelled on TCFD and will enable companies to report on nature-related dependencies, impacts, risks and opportunities and integrate these into their decision making. It is therefore encouraging that nature-related issues, such as water and waste management, are increasingly identified as material and progress tracked against timebound targets.
Best-practice recommendations
- Leverage your double materiality assessment to identify ESG information that is decision-useful for investors.
- Report against all 11 recommended TCFD disclosures, including the impact of climate change on your financial planning.
- Identify climate-related opportunities and explain how they will enable you to participate in a low-carbon economy.
- Set science-based targets for your net-zero transition plan and explain your strategy for achieving them.
- Consider nature-related ESG issues in terms of risks and opportunities for your business and set timebound targets.
At our launch event on 19 July, Luminous’ Stephen Butler, Investor Engagement & ESG Disclosure Director, Rachel Madan, Sustainability & Impact Director, and Nina Kefer, Senior Consultant, IE & ESG Disclosure, along with Jonathan Labrey, Chief Connectivity and Integrated Reporting Officer, IFRS Foundation, shared the outcomes of our proprietary research. They also offered practical advice on how companies can integrate ESG, bring their equity story to life, communicate their purpose and culture, and much more.
If you would like to access the recording, slides or transcript from our event, please get in touch.
