The Financial Reporting Lab of the Financial Reporting Council (FRC) has published a report on risks, uncertainties, opportunities and scenarios and the FRC has published a thematic review on streamlined energy and carbon reporting.
Risks, uncertainties, opportunities and scenarios
The Lab report on risks, uncertainties, opportunities and scenarios sets out investors’ expectations in relation to reporting in these areas and gives best practice examples.
The report says that investors are looking for information relating to risks, uncertainties and opportunities that contributes to their understanding of a company’s business model, longer term strategy, resilience and viability. It emphasises the inter-relationship between risks, uncertainties and opportunities.
Key recommendations in the report include:
- Governance and processes – Investors want to understand a company’s risk management processes, who is responsible for the various aspects of monitoring and managing risks, and how the outputs are presented to the board or risk committee. Investors are also keen to understand how these processes adapt or change over time and how effectively they have functioned.
- Approach to disclosures – Disclosures should be appropriately linked to other aspects of the annual report including the business model, strategy and viability statement.
- Scenarios and stress testing – Investors finds scenarios and stress tests particularly helpful given they provide insights into areas that are uncertain and cannot necessarily be predicted or calculated with certainty. The report emphasises that scenarios should be company-specific and that it is useful for companies to explain how they influence its strategic decisions and the company’s business model.
Streamlined energy and carbon reporting
The FRC’s thematic review on streamlined energy and carbon reporting follows its thematic review on climate reporting which it published in November 2020 (see our corporate update 2020/21).
The Energy and Carbon Reporting Regulations (2018/1155) require quoted companies to disclose their energy consumption, and large companies and limited liability partnerships to report on their greenhouse gas emissions and energy consumption (see our corporate update 2018/23).
The thematic review contains a helpful summary of the requirements, highlights examples of emerging good practice and sets out the FRC’s expectations for reporting.
Key observations in the thematic review include:
- Compliance with requirements – Overall compliance was good, with only a few errors or omissions in reporting identified. Many companies also went beyond the mandatory requirements, for example by disclosing scope 3 emissions or seeking independent assurance on the data disclosed.
- Methodologies – Companies are required to describe the methodologies used for calculating their greenhouse gas emissions and energy consumption. The FRC notes that reports did not always provide sufficient information about the methodologies used, including which entities were included in group-wide disclosures. It also notes that cross-referencing to information on a company’s website does not meet the requirements.
- Ratios – Companies are required to disclose a ratio which expresses the company’s annual greenhouse gas emissions in relation to a quantified factor associated with the company’s activities. The FRC notes that it was sometimes unclear whether the ratio selected was the most appropriate for the company’s operations as encouraged by the Government’s Environmental Reporting guidelines which accompany the streamlined energy and carbon reporting regime (see our corporate update 2019/3).
- Energy efficiency – The “principal measures” taken by the company to increase its energy efficiency are not always clearly described by companies.