June 22, 2022 Updating the strategic report
One of the key building blocks of annual reporting, the strategic report is designed to provide information for shareholders. Specifically, information that should enable shareholders to assess the extent to which the directors have performed their duty under section 172 of the Companies Act 2006; namely promoting the success of the company. As such, the strategic report should not only provide meaningful context, it should also be fair, balanced and understandable.
With that in mind, how do you know what to include in the strategic report? Well, the Companies Act is one place to start; but it is not the only piece of legislation which will inform the layout and content of the strategic report. Alongside basic information such as strategy, objectives, and business model, companies may also have to disclose information about a range of issues from environment and social issues to human rights and anti-corruption measures. Some companies will also have to report on climate-related financial disclosures and gender diversity.
Rather than ploughing through legislation to decide what they should include in their strategic report, in the first instance directors may decide to turn to the Financial Reporting Council (FRC) for guidance. First published in 2014, the FRC has in 2022 updated its strategic reporting guidance for companies and limited liability partnerships (LLPs).
Firstly, this updated guidance takes account of the need for traded LLPs and banking LLPs to publish strategic reports. There is also clarification on the scope and definitions of the reporting requirements for public interest entities.
Importantly, the new guidance also takes in the need to report on climate related financial risks and opportunities within the strategic report. This information is required for public interest entities and AIM companies with more than 500 employees. Other UK registered companies and LLPs with turnover in excess of £500m and more than 500 employees are also required to report on climate related financial risk. Having said that, as with other sections of the strategic report, directors may omit this section provided they reasonably believe that information on climate related financial risk will not help with understanding the nature of the company’s business. However, if this section is omitted directors need to give a clear and reasonable explanation of their decision within the non-financial and sustainability information statement part of the annual report.
For those who are looking for additional guidance in respect of climate risk reporting, in February 2022 the Department for Business, Energy and Industrial Strategy (BEIS) also placed a 23 page document online.