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Jan 30, 2023

UK regulator to focus on data, materiality and audit quality in ESG reporting

Financial Reporting Council outlines areas of attention for 2023

As part of its agenda this year, the UK regulator for financial reporting will review ESG data distribution, materiality decision-making and how auditors consider climate risk.

The Financial Reporting Council (FRC), which monitors reporting quality and offers best practice advice, says in its ESG statement of intent for 2023 that it will examine a number of areas with ‘ongoing challenges’ for listed companies.

Computer screen with charts
Photo: Carlos Muza

The work on ESG data will focus on distribution and consumption, following a report last year into how sustainability data is produced by companies.

The coming research will examine ‘how ESG data is communicated to the market and how investors, regulators and other stakeholders engage with and consume ESG data to meet their needs,’ says the FRC.

On the topic of materiality, the regulator says it is looking into how materiality decisions by listed companies could be improved so they offer ‘stakeholders with relevant and decision-useful information, rather than ever-longer reports’.

Turning to audit and assurance, the FRC notes that expectations are increasing around climate-related risks.

‘The FRC’s program of audit quality inspections will continue to pay particular attention to the auditor’s work on climate-related risks, including the linkage between the audited financial statements and climate-related disclosures elsewhere in the annual report,’ says the body.

Broad focus

Other areas of focus this year include TCFD disclosure, which is now mandatory in the UK, corporate governance reporting and investor integration of ESG issues.

The statement of intent ‘highlights the ongoing challenges and opportunities of producing ESG reporting and disclosures and where the FRC’s focus in 2023 will continue to provide guidance and examples of best practice, both in the UK and internationally,’ says Mark Babington, executive director of regulatory standards at the FRC, in a statement.

‘Improving transparency on climate and wider ESG risks and opportunities, as well as related governance activities and behaviors, is a key priority for our work, benefiting all those stakeholders that demand decision-useful reporting, which underpins effective decision-making in capital markets.’