A review by the Financial Reporting Council (FRC) has concluded that corporate reporting on climate change must improve to meet the expectations of investors and other users.

The regulator expressed its backing for the introduction of global standards on non-financial reporting. In the meantime, it urged UK public interest entities to report on the TCFD’s (Task Force on Climate-related Financial Disclosures) recommended disclosures, as well as the SASB (Sustainability Accounting Standards Board) metrics for their industry.

Regulator underlines importance of a “reporting framework”

The FRC’s review found that while climate change may not be the most immediate challenge for some companies, there was a need for it to be integrated into decision-making now, to enable the subject to be addressed in an orderly way.

The regulator said that its review reflected the important part played by boards, companies, auditors, professional organisations and investors in considering and responding to climate-related issues, adding that “each has the capacity to act as a driver of change.”

What were the key findings of the review?

Various findings, expectations and next steps were set out by the FRC review which concluded that there was only “limited” evidence of business models and company strategy actually being influenced by climate considerations.

Furthermore, the review stated that, while some companies had set strategic goals such as “net zero”, their reporting did not make clear how progress towards these goals would be achieved, monitored or assured.

An increasing number of companies did provide narrative reporting on climate issues, frequently meeting minimum reporting requirements. Users, however, were calling for additional disclosures to inform their decisions.

The review also concluded that the manner in which climate change matters were considered and disclosed in the financial statements “lags behind narrative reporting”. Indeed, the review noted areas of possible non-compliance with the requirements of International Financial Reporting Standards.

There was also considerable variation across firms in the quality of support, training and review provided to audit practices on climate change. Audits reviewed indicated a requirement for auditors to improve how they considered climate-related risks in the planning and execution of their audits.

UK professional bodies and audit regulators in the Crown Dependencies were responding to climate change, the report said, but differences were observed in the substance and granularity of their approaches.

In addition, while investors backed the TCFD framework, they also wished to see disclosures in relation to the financial impacts of climate change. As the review noted, investors are themselves subject to evolving regulations.

“Now is the time for all of us to raise the bar”

Sir Jonathan Thompson, FRC Chief Executive, commented: “Users of corporate reports expect more from companies, auditors, regulators and standard setters in terms of climate change reporting.

“While this review highlights some bright spots of better practice in both corporate reporting and auditing, we also found that more needs to be done. I know that this is a difficult time to ask for more, but now is the time for all of us to raise the bar.”

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November 2020