The Financial Reporting Council (FRC) is calling for improvements in corporate reporting on climate change issues, and has signalled its support along with other UK regulators for the IFRS Foundation’s work on developing a global approach to sustainability reporting
The regulator’s thematic review of climate-related considerations by UK boards, companies, auditors, professional bodies and investors, was conducted during the course of this year, with the FRC saying it is critical that these issues are integrated into decision making now in order to ensure effective action.
However, its review found that while it is the board’s responsibility to consider climate-related issues, there is little evidence that business models and company strategy are influenced by integrating climate considerations into governance frameworks.
Some companies have set strategic goals such as 'net zero’, but it is unclear from their reporting how progress towards these goals will be achieved, monitored or assured.
An increasing number of companies provide narrative reporting on climate-related issues. While minimum legal reporting requirements are often met, users are calling for additional disclosure to inform their decision making.
The FRC said most of the companies reviewed provided information on the outcomes of environmental policies, including those relating to climate change. Two thirds had set targets with respect to climate change, but only half of those explained how they had performed against previous targets.
Consideration and disclosure of climate change matters in the financial statements lags behind narrative reporting. The review identified areas of potential non-compliance with the requirements of IFRS.
The quality of support, training and review provided to audit practices on climate change varies considerably across firms, according to the FRC.
Audits reviewed indicated that auditors need to improve their consideration of climate-related risks when planning and executing their audits.
For over half of the audits reviewed, the FRC found auditors had not considered climate change when identifying and assessing the risks of material misstatement to the financial statements.
Audit teams had neither considered the range of physical and transition risks to which the entity might be exposed, nor the risks that climate change pose for its customer base or supply chain over different time horizons.
Where management had included a principal or emerging risk in relation to climate change, only a few audit teams showed how they had considered this in their own risk assessment.
In addition, the FRC’s review found UK professional bodies and audit regulators in the Crown Dependencies are responding to climate change, but approaches differ in terms of substance and granularity.
Sir Jonathan Thompson, FRC chief executive, said: ‘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.’
The FRC said it supports the introduction of global standards on non-financial reporting and will engage with organisations working to achieve that goal.
In the meantime, the FRC is encouraging UK public interest entities to report against the Task Force on Climate-related Financial Disclosures’ (TCFD) 11 recommended disclosures and, with reference to their sector, using the Sustainability Accounting Standards Board (SASB) metrics.
In a separate announcement, the UK government and UK financial regulators including the FRC have said they welcome the publication of the IFRS Foundation trustee’s consultation on a global approach to sustainability reporting.
This was published on 30 September and closes on 31 December.
The statement recognises that climate change and sustainability are challenges that extend beyond national borders, and that internationally agreed standards will help to achieve consistent and comparable reporting on environmental, social and governance (ESG) matters.
It expresses support for the IFRS Foundation Trustees leading the conversation and work in this area. The statement also sets out the UK government and UK financial regulator’s current commitments and future intentions in this space.
These include a commitment to implementing the TCFD reporting recommendations in the UK in anticipation of the UK’s G7 Presidency, and as part of the UK’s COP26 Co-Presidency and international leadership on green finance and climate change.
Government and regulators are running consultations to determine how best to introduce and mandate TCFD-aligned disclosures across the UK economy, which will promote more efficient market pricing and capital allocation to support economic recovery and the transition to net zero carbon emissions.
The statement said the UK government and regulators believe that the proposal to create a new board, within the IFRS Foundation structure, would allow the effective exploration, reconciliation and resolution of ideas and challenges that are relevant to reporting of material sustainability factors in the first instance, and reporting of wider sustainability impacts in the longer term.
Establishing a new sustainability board alongside the IASB would promote much-needed integration of financial and non-financial reporting, within a common architecture, while the Foundation would provide the pre-requisite transparent and robust governance structure.