While the global focus on climate change has intensified over recent years, reporting by companies on the matter has not kept pace with the demands for information from stakeholders. It remains high on the agenda for investors, governments and regulators, as well as society at large. Climate change and how society responds to it will ultimately affect all companies to some extent and reporting on it and the risks they create for the company, is a key challenge for the coming reporting season.
Why does climate change reporting matter?
Government policies to control climate change are crystallising, such as the UK government's target of net zero greenhouse gas emissions by 2050 or its ban on sales of new petrol and diesel cars from 2030. Investors consider climate change in both allocating capital and in pricing risk and they are, therefore, increasingly asking companies for more transparent disclosures about climate change risks, effects and opportunities arising from the transition to a low-carbon economy, and what is being done to address the challenges.
FRC Climate thematic report
In November 2020, the FRC published its 'Climate Thematic' reporting findings from an extensive review of how climate-related issues are addressed in governance, corporate reporting and audit, and on the roles of professional bodies and investors. The FRC's key findings addressed at boards and companies included the following:
- Boards – It is the board's responsibility to consider climate-related issues, but there is limited evidence of climate considerations being integrated into governance or influencing business models and company strategy.
- Corporate reporting – While the number of companies reporting on climate-related issues is increasing, users continue to call for additional disclosures. Disclosure in the financial statements lags behind narrative reporting and the FRC identified areas of potential non-compliance with IFRS requirements. It is sometimes unclear from companies' reporting how progress towards climate-related goals set (such as 'becoming net zero') will be achieved, monitored or assured.
- Investors - Investors support the TCFD framework, and also expect to see disclosures regarding the financial implications of climate change.
Expectations for corporate reporting
To help companies improve their reporting on climate related issues, the FRC has set out expectations covering both narrative reporting and financial statement accounting and disclosures. These expectations include:
- Non-financial information statements and other statutory disclosures that address the impact the company has on the environment and describe policies and targets in detail
- Consideration of climate change effects on the company within principal risks and uncertainties and business model disclosures
- Coherent linkage of climate related disclosures between narrative reporting and the financial statements
- Consideration of the effect of climate change on key assumptions and sensitivities used, for example, in impairment reviews
- Where the impact is expected to be significant, explanations of how climate change has been taken into account in expected life estimates and fair value calculations.
The FRC expects companies to consider the guidance in the November 2019 IASB article 'IFRS Standards and climate-related disclosures' which explains how climate-related matters can be relevant to the application of existing IFRS requirements. In November 2020, the IASB published educational guidance to complement that article. BDO has now released a publication 'IFRB 2020/14 Effects of climate-related matters on financial statements' providing an overview of the IASB guidance.
The FRC also intends to:
- Undertake a review of reporting under the Streamlined Energy and Carbon Reporting regulations in 2021
- Highlight areas of the financial statements of UK GAAP reporters where climate change could be a consideration.
Read the FRC's full Climate Thematic.
Developments to expand sustainability reporting
Many investors are concerned that their information needs are not being met by existing mandatory reporting requirements, supporting the case for their development and expansion.
There are currently a large number of different voluntary reporting initiatives and frameworks for climate change and sustainability reporting including the Financial Stability Board's TCFD, the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative, the Climate Disclosure Standards Board and the Climate Disclosure Project. These multiple frameworks can be confusing for preparers of corporate reports but there are now signs of some convergence.
In September 2020, the IFRS Foundation published a consultation paper on Sustainability Reporting to assess the demand for global sustainability reporting standards. It proposes to create a new Sustainability Standards Board ('SSB') operating alongside the IASB to develop global sustainability standards with an initial focus on climate change. As the TCFD recommendations have already been widely endorsed, it is likely that they would be considered in the development of such standards.
The consultation is open for public comment until 31 December 2020. The proposals are explained in a BDO Global publication 'IFRB 2020/13 IFRS Foundation Trustees consider sustainability reporting' which also provides a useful summary of the current landscape of sustainability reporting.
Towards mandatory TCFD disclosures
Until a global solution is in place, the FRC is encouraging UK public interest entities to report voluntarily under the TCFD's 11 recommended disclosures and SASB sector specific metrics.
The government has also published an indicative roadmap for the introduction of mandatory TCFD reporting requirements across the UK economy by 2025 beginning with listed companies and financial services entities with other types of large entities to follow gradually. To implement the first stage of this, the FCA has indicated that it intends to introduce a new listing rule for premium-listed commercial issuers requiring TCFD disclosures effective from 1 January 2021 as proposed in a consultation earlier this year (see Tougher environmental disclosures for listed companies).
Next steps
We encourage companies to ensure climate change is on its agenda for corporate reporting. Do consider the FRC's expectations and IASB guidance and revisit existing requirements. UK premium listed companies should start planning for TCFD reporting as this is likely to be a complex and time-consuming exercise for many.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
