Narrative reporting is everything in an annual report that is not the numbers: the strategic report, the directors' report, the governance disclosures and, increasingly, the sustainability information. It is the part readers actually read, the part with the loosest rules, and the part where a company either explains itself or reveals that it cannot.
The strategic report
The strategic report is the centrepiece, required of all companies other than those entitled to the small companies exemption. Its statutory purpose is to inform members and help them assess how the directors have performed their duty to promote the success of the company, and it must contain a fair review of the business and a description of the principal risks and uncertainties facing it.
The fair review has to be balanced and comprehensive, analysing development, performance and position, and using key performance indicators — financial and, where appropriate, non-financial. Larger companies must also cover environmental matters, employees, and social, community and human rights issues, together with the company's policies on them and their effectiveness. Quoted companies add more, including greenhouse gas and energy disclosures.
Then there is section 172. Large companies must include a statement describing how the directors have had regard to the matters in section 172(1) — the long term, employees, suppliers and customers, the community and environment, reputation, and fairness between members — when performing their duty. The requirement is to describe how the interests were considered and how that affected decisions, and the statements that fail are the ones listing stakeholder groups without a single decision attached.
The directors' report, and what moved out of it
The directors' report retains a residual set of disclosures — dividends recommended, directors serving during the year, and, where applicable, political donations, employee involvement, disabled employees, financial instruments and post-balance-sheet events, alongside the directors' statement as to disclosure of information to the auditor. Much of what used to sit here migrated to the strategic report when it was introduced, which is why the directors' report in a modern annual report is short and the strategic report is long.
Small companies may omit the strategic report entirely, and those filing filleted accounts currently leave the directors' report out of what is filed at Companies House — an option the Economic Crime and Corporate Transparency Act removes when the accounts filing changes take effect on 1 April 2028, from which point small companies must file the directors' report rather than omit it. Keep that separate from the announced intention to remove the requirement for any company to prepare a directors' report at all: that is government policy under the corporate reporting reforms, not yet law, with no commencement date — so the current obligations stand, and in the meantime the filing requirement is getting wider rather than narrower.
What separates a good narrative report from a compliant one
The regulator's recurring criticisms are consistent year after year, and they are worth reading as a checklist of what to avoid:
- Boilerplate risk disclosure. Principal risks that could belong to any company in the index, with no indication of which are actually the most significant, how they have changed, or what management is doing about them;
- Alternative performance measures given more prominence than statutory ones, without reconciliation, without explanation of why they are useful, and without consistency between years;
- KPIs that do not connect to the strategy described three pages earlier, or that change when the previous ones stopped being flattering;
- Section 172 statements that describe process rather than decisions. "We engage with stakeholders through surveys" is not a statement of how a decision was affected;
- A disconnect between the narrative and the financial statements — an upbeat review sitting alongside an impairment, a going concern discussion in the notes that the front half never mentions. This is the criticism that most damages credibility, because it suggests two documents written by two teams who did not speak.
Where sustainability reporting fits
Climate and sustainability disclosure has moved from voluntary to mandatory for large and listed companies, and it sits inside the narrative report rather than alongside it — with the UK's own sustainability reporting standards now finalised and the regulatory perimeter still expanding. The practical consequence for preparers is that the narrative report increasingly contains forward-looking, quantified information subject to assurance, which is a different discipline from the descriptive prose that surrounds it. Our guide to ESG reporting covers the requirements themselves.
For smaller companies outside the mandatory scope, the pressure arrives through the supply chain and the lender rather than the statute — and a proportionate, honest disclosure is far better received than an aspirational one.
Producing it without a three-month project
The companies that produce good narrative reports treat them as a year-round output rather than a February exercise: risks reviewed by the board quarterly with the register maintained as they change; section 172 considerations recorded in the board minutes at the time of the decision, so the statement is drafted from the record rather than invented; KPIs agreed once and held stable; and one person owning consistency between the front half and the accounts.
Done that way, the report is a by-product of governance. Done the other way, it is a drafting exercise that produces exactly the boilerplate the regulator complains about.
Acumon supports narrative reporting through financial reporting and corporate governance work, with ESG assurance where the sustainability disclosures need it. If your principal risks have not changed in three annual reports, that is the section to start with.