FRC to review climate change reporting
Over the years we’ve seen many, many changes in the reporting that companies are required to publish, and we enjoy teaching the next generation of accountants what these are, so […]
Over the years we’ve seen many, many changes in the reporting that companies are required to publish, and we enjoy teaching the next generation of accountants what these are, so they can lead from the front in their respective roles. A new shake-up, currently being mooted by the FRC, concerns how companies and auditors assess and report on the impact of climate change, which we think is very timely.
The review is primarily concerned with how the quality of information can be improved to support informed decision-making by investors and other stakeholders.
What is the FRC looking for?
The FRC plans to monitor how companies and their advisers fulfil their responsibilities, and seek to encourage better practice.
A sample of company reports and accounts across industries will be reviewed to assess the quality of their compliance with reporting requirements in relation to climate change. A sample of audits will also be analysed to see how auditors are ensuring the impact of climate risk has been appropriately reflected in company reports and accounts, including the key areas of judgement and related disclosures.
In addition, the FRC will assess the resources available within audit firms to support the evaluation of the impact of climate change on audited entities.
Focus on Quality
The regulator says it will be evaluating the quality of disclosures under the new UK corporate governance code regarding risk, emerging risk and long-term factors affecting their viability.
It will also look at whether the financial reporting lab’s recommendation for companies to report in line with the task force on climate-related financial disclosures framework has been adopted, highlighting developing good practice.
Sir Jon Thompson, FRC CEO said: “Not only do boards of UK companies have a responsibility to report their impact on the environment and the risks of climate change to their business, but investors expect them to operate sustainably. Auditors have a responsibility to properly challenge management to assess and report the impact of climate change on their business.”
Environmental disclosure analysis
The Alliance for Corporate Transparency, a collaborative initiative launched by public interest law organisation Frank Bold, has analysed the information that companies disclosed on their environmental and societal risks and impacts following the requirements introduced by the EU Non-Financial Reporting Directive.
Its report analysed 1,000 companies across Europe and found that poor quality and comparability of corporate disclosures are hindering efforts to scale up sustainable finance, as investors do not have reliable information to inform their decisions.
Companies tend to focus on presenting general policies and commitments for key issues such as climate, human rights, and anti-corruption, but not concrete targets, outcomes of policies with respect to these targets.
Only 22% of companies provide their key performance indicators in summarised statements, while just 13.9% of companies report on alignment of their climate targets with the Paris agreement goals.
While this number is higher in the energy and resource extraction sector (23.5%), this still means more than three quarters of companies do not report on their targets and plans in this context.
A quarter (23.4%) of companies provide specific information that allows readers to understand the climate-related risks they are facing – out of 53.8% reporting that they recognise the existence of such risks. 13.4% of financial companies provide details on the exposure of their portfolios to the most polluting sectors.
The research found little difference between different European regions, with the exception that companies from former Eastern Europe lag behind, and Nordic companies tend to be among the regions that report more specific information than others.
Filip Gregor, head of responsible companies at Frank Bold, said: ‘The results of the research show that existing legislation is not meeting its objectives and it seems that the only way to address the problem is to specify what companies should be reporting.
