UK financial institutions not measuring climate impacts on assets, says FRC

Major UK banks and asset managers have not started to disclose how climate change could impact their future financial performance, the Financial Reporting Council (FRC) has said.

The report, published on Wednesday, marks the second time that the UK’s reporting watchdog has assessed a sample of TCFD-aligned disclosures, following an inaugural study carried out last year.

In the most recent exercise, the FRC looked at reports filed by a total of 20 companies, including five banks and four asset managers from the FTSE250 during 2022-23. This is the first year that large listed companies and financial institutions in the UK face mandatory climate reporting requirements.

All the banks and four of the asset managers did not quantify climate-related financial impacts on their loan books and investment portfolios, with four banks explicitly stating they did not consider the impacts to be material at this time.

Only UK-based manager M&G was flagged as having provided information on how climate could impair investment valuations and income. The other FIs were not identified.

The FRC said it had written to a total of 16 companies during the most recent reporting year to seek more information on this or to highlight areas of improvements. It may consider entering into “substantive correspondence”, it said, particularly if carbon-intensive companies fail to meet its expectations.

Banks were separately noted for filing very long reports and have been asked to “think carefully about how to present the required information in a clear, concise and understandable manner”.

Both banks and asset managers were recognised for high rates of disclosures around their financed emissions, which make up the vast majority of overall emissions, despite issues around comparability due to the use of company-specific methodologies.

However, the FRC noted that FIs did not include financed emissions when tracking progress against their nearest climate targets.

The assessment covered companies from the utilities and building materials sectors, in addition to FIs.

An area of concern for the FRC was the poor connectivity between company climate commitments and financial statements.

According to the body, very few companies explained how their climate-related targets and transition plans had influenced the judgements and estimates used in their financial statements, “despite considerable investor interest in this”.

This was especially noticeable in the materials and buildings and energy sectors, where a larger impact might be expected, the FRC said.

UK companies are due to face mandatory requirements to develop climate transition plans in the next few years. A prototype framework is expected to be published by the government-convened Transition Plan Taskforce in the autumn and will be subject to consultation.

More broadly, reporting companies have been warned by the watchdog to stop highlighting “immaterial areas of their business which are considered more green” at the expense of carbon-intensive operations that may be more material.

“The inclusion of immaterial information can obscure key messages and impair the understandability of information provided.”