Understanding of the effects of climate change and the need to take action has increased significantly over recent years, leading to an increase in both public awareness and political initiatives. It is now clear that many, if not most, companies will be affected either directly or indirectly by climate-related risks or government or stakeholder actions aimed at addressing their causes. As a result, investors are increasingly calling for companies to report on challenges, targets and activities to support the action they are taking on this issue.
The Financial Reporting Council’s (FRC) Financial Reporting Lab has published a Report on climate-related corporate reporting, which the Lab notes has received “an unprecedented amount of investor engagement”.
Meeting investor expectations
The Lab Report sets out how companies can fill the gap between investor expectations and current corporate reporting practice, and notes that investors would like companies to articulate:
- How boards consider and assess the topic of climate change
- Whether, and how, the business model may be affected by climate change, whether it remains sustainable, and how the company may respond to the challenge posed by climate change
- What the opportunities and risks are, including the prioritisation of risks and their likelihood and impact
- What changes the company might need to make to strategy to capitalise on a changing climate and related opportunities
- What scenarios might affect the company’s sustainability and viability, and
- How the impact is measured and how the company measures the climate-related challenges and the success of its strategy through strategically aligned, reliable, transparent metrics and financially-relevant information.
The Lab Report also highlights that the UK Government announced, in its July 2019 Green Finance Strategy, the expectation that listed companies and large asset owners should disclose, in line with the Task Force on Climate-related Financial Disclosures’ (TCFD) Framework recommendations, by 2022. The Report includes a short summary of the TCFD framework, which includes four core elements of recommended climate-related financial disclosures:
- Governance - The organisation’s governance around climate-related risks and opportunities.
- Strategy - The actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning.
- Risk management - The processes used by the organisation to identify, assess, and manage climate-related risks.
- Metrics and targets - The metrics and targets used to assess and manage relevant climate-related risks and opportunities.
As such disclosures may well become mandatory (either by law or due to market forces) in the short- to medium-term, companies are recommended to start looking at them and considering whether their reporting can be evolved over time, rather than risk being left behind as practice develops.
Most companies, to a greater or lesser extent depending on their size and listing status, are already required to provide related disclosures under the Companies Act 2006’s strategic report and directors’ report requirements and the UK Corporate Governance Code 2018. The TCFD Framework might provide a practical method of tying these disparate requirements together.
The report sets out practical help, which includes both high level explanations of concepts that may not be widely known to preparers of annual reports, and includes sections that:
- Contain investor and company views on the four TCFD core elements, including a set of questions companies should ask themselves to help develop their reporting on each of those elements
- Provide examples of developing reporting practice, including extracts that illustrate how companies are trying to meet the reporting challenge, based on the same four TCFD core elements.
The Lab Report is recommended reading for companies, particularly large companies, those that are listed on Regulated Markets and those that wish to be prepared for legal and market-led corporate reporting changes expected in the near future.
Read the FRC’s Lab Report on climate related reporting.
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