30 November 2020: A unified set of standards for climate-related disclosures is some time away, but FRC’s review into the subject points businesses towards frameworks that could considerably boost reporting quality.
With a growing interest from stakeholders in climate-related disclosures in company reports, the Financial Reporting Council (FRC), decided to review what was happening in the marketplace in order to make recommendations on how to improve the quality and quantity of reporting.
The review involved collaboration across several FRC teams, including corporate reporting review, audit quality review, professional oversight and the FRC Lab. The main conclusion to that report, released in mid-November, was that not enough is being done.
“You’ve got companies reporting, but a number of people that I’ve spoken to about this say that it’s often very much done in a marketing way, rather than a more objective and evidence-based assessment of what the company’s doing and what it needs to do,” explains Mark Babington, FRC’s executive director, regulatory standards.
Part of the issue is that there is no common set of standards for businesses to follow. It’s currently difficult to compare the climate-related reporting activities of different companies, as you’re not necessarily comparing like with like. FRC has recommended the steps that auditors can take to better integrate assessments of climate risk in the work they carry out and has endorsed the use of Taskforce for Climate-Related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB) as a framework for reporting.
You’ll be aware that the IFRS Foundation is consulting on a Sustainability Standards Board, and we, along with other regulators and government, have issued a supportive statement about that,” says Babington. “But unfortunately, with the best will in the world, that will take quite some time. Not only to set up a body, but also for it to develop an appropriate conceptual framework and to put standards out.”
TCFD offers a high-level, principles-based framework, while SASB provides something more akin to application guidance for different sectors to help them ramp up the quality of what they’re doing. TCFD is an integral part of the government’s push for better climate-related reporting; Chancellor Rishi Sunak recently announced a roadmap for the mandatory application of the TCFD framework for large entities, banks, insurance companies and pension schemes, to be rolled out from 2021.
Investors are taking climate impacts very seriously, says Babington. That, plus the pressure from government for businesses to work towards its 2050 net-zero goal, will drive a shift in corporate reporting towards better climate-related reporting.
“One of the real problems here is, compared to financial reporting and a set of accounts, the data you rely on to do climate reporting may well be less mature or well developed,” says Babington. “The Chancellor’s statement really provides some strong impetus for companies to start saying” what are we going to have to report on and what are we going to have to measure? Also, have you got the appropriate arrangements in place to provide you with the data to do that reporting and ensure that it’s of an appropriate quality?”
While the COVID-19 pandemic is a potential challenge to progress, it also provides an indication of how things may shift. “A lot of stakeholders in the pandemic have said: we will only support companies that behaved well. The importance of appropriate behaviour is perhaps heightened compared to what it’s been in the past. That sets a really important lesson for companies: that they may lose stakeholder support if they’re not actually doing the right thing.”
FRC, along with other regulators and government, will keep working to improve the framework for reporting and also looks to highlight good practice. “There are some existing examples of companies with high-quality reporting. Not as many as I’d like to see, but, we can draw attention to it so others can learn from what’s being done well.”
Despite the lack of maturity in the data and a lack of good practice examples to draw from, the profession is well-placed to address the challenges of climate-related disclosures, says Babington, with such a clear direction of travel for how corporate reporting should evolve.
“We have set out, quite early on, what our expectations are in respect of narrative reporting and financial statements and how those should respond to the needs of reporting on climate-related matters. That is a helpful signpost.”