The FRC’s assessment of current ESG challenges

On 7 July 2021, the FRC published its FRC Statement of Intent on Environmental, Social and Governance challenges. This paper sets out areas in which there are issues with ESG information if companies are to report in a way that meets the demands of stakeholders, how to address some of these demands and the FRC's planned activities in this area.

The FRC's view is that there should be better:

• Production - to ensure that better internal information leads to better decisions and better insight for stakeholders. Often reporting is aspirational and high level (eg, a commitment to meet a net-zero target, or a commitment to invest a certain amount to meet such an objective), however, it does not provide users with information about progress, whether the entity's strategy will deliver the commitment, and whether financial statements are aligned with the commitment.

• Audit and Assurance - so that the reported information is robust and reliable. There can be a lack of credibility in ESG information, which entities are often keen to address by commissioning independent assurance. It is especially important to be clear about what is assured and what level of assurance is provided.

• Distribution - so that information is made accessible to interested parties.

• Consumption - to ensure this information leads to better decision making by stakeholders. Users can often have difficulty obtaining ESG data and where it does exist it is often based on incomplete frameworks and differing methodologies, has limited comparability, or is not timely. The lack of useful and useable information results in stakeholders finding it difficult to make effective decisions and investors finding it difficult to address their own regulatory requirements. ESG information is currently subject to a patchwork of regulatory oversight and enforcement, which does not aid consistency.

• Supervision - so that information and activity is appropriately monitored and requirements are enforced. With increasing expectations of more and better reporting on ESG there is a need to supervise whether companies, auditors and assurance providers meet relevant existing and future requirements.

• Regulation - as coordinated and coherent regulation leads to efficiency. There is a need to ensure that international ESG standards work effectively alongside a domestic framework, and as the international activity develops there is a need to address any gaps at a national level. Without wider cooperation and cocreation it is unlikely that frameworks will be compatible, timely and of equal quality. Greater coordination is needed to ensure we have a reporting ecosystem that works as effectively as it can.

The FRC supports global standards for non-financial reporting and welcomes the activity of the IFRS Foundation Trustees to set up an International Sustainability Standards Board. Last year the FRC announced an expectation that public interest entities should report against the Task Force on Climate-related Financial Disclosures framework and the Sustainability Accounting Standards Board (SASB) sector-specific metrics relevant to the entity as building blocks towards this international approach and to assist investors to understand material ESG issues at companies. The FRC has assessed UK SASB reporting practice and also published a snapshot of market practice, showing an increase in uptake, but that more and better reporting is needed.

The FRC proposes three modes of action as being most helpful in addressing the challenges:

• Co-ordinating - whilst there have been great strides with coordination on specific frameworks such as the TCFD, the FRC believes wider coordination is necessary within the UK and internationally.

• Connecting - the FRC believes that whilst the UK can progress its own agenda, it needs to connect with others across the international environment to foster solutions that are proportionate and effective.

• Contributing - if ESG is to work, the FRC believes that many policies, frameworks and approaches need to be aligned or connected. The UK has benefitted from the convergence of global accounting and auditing standards and the same benefits need to be secured in ESG reporting.

Our view

We agree with the FRC's suggestions. Companies need as much alignment as practicable of UK and international requirements and standards to avoid unnecessary complexity and costs and to assist with comparisons for stakeholders and investors.

For more information on ESG issues, please visit ESG: building value, minimising risk.