In February, the Financial Reporting Council (FRC) announced what it has called a “major review” of how companies and auditors assess and report on the impact of climate change, with the findings due to be published in the Autumn, ahead of COP26.
But investors are set to play a key role in this review, according to the FRC’s Hannah Armitage, with investor expectations of climate-related corporate reporting “pretty high”.
The disclosure investors look for from companies is largely based on the Task Force on Climate-related Financial Disclosures (TCFD), which is not compulsory. However, it is a framework that companies should respond to, according to the FRC’s Armitage.
“But investors are also themselves facing increasing requirements in this area,” she added, “in terms of what they do in their own investment decision making but also how they report to beneficiaries about the actions that they’ve taken”.
“As this is a developing area for companies, auditors, regulators, so it is also a developing area for investors and there are differing levels of sophistication in terms of how they’re taking into account this issue,” she said.
As part of its climate review, the FRC has set out that it will be looking at how companies fulfil their responsibilities in this area by “reviewing a sample of company reports and accounts across industries to assess the quality of their compliance with reporting requirements in relation to climate change”.
It will also be “assessing a sample of audits to review how auditors are ensuring the impact of climate risk has been appropriately reflected in company reports and accounts”.
In a recent FRC podcast, Julia Morris, part of its climate review team, said that while climate risk has not “featured heavily on auditors’ radars”, she urged “they really need to respond to the fact business models and the underlying assumptions are being impacted by climate change”.
Under the current framework for climate reporting, Geoff Legouais, part of the FRC’s corporate reporting review team, said these fall into broadly two areas, the first being the front end of a company’s strategic report.
He said this is where there might be “specific disclosures on companies’ impact on the environment, on directors’ duties and some disclosures around their engagement with stakeholders”, while the second is the “back end” in companies’ financial statements.
Armitage said the review’s findings later in the year will give a “state of play indication” of what best practice looks like and where companies are expected to “go next”.Last Updated: 21 March 2020