The Financial Reporting Council (FRC) is to conduct a major review of how companies and auditors assess and report on the impact of climate change
The review will consider how the quality of information can be improved to support informed decision-making by investors and other stakeholders.
The FRC will monitor how companies and their advisers fulfil their responsibilities, and seek to encourage better practice.
The regulator will be 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, and will also assess a sample of audits to review 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 audit teams in evaluating the impact of climate change on audited entities.
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.
The FRC will also consider how investors are addressing the climate challenge in the stewardship of their investments and in their response to systemic and market risks when it monitors the first reports under the new stewardship code, which will be issued from the beginning of 2021.
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 FRC has high standards for company disclosure, including regarding climate change. Company reports and accounts are essential to understanding how the corporate world is responding to the challenge of climate change.’
Separately, 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 on 1,000 companies across Europe found the 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.
Reports focus on presenting general policies and commitments in 80%-90% of cases for key issues such as climate, human rights, and anti-corruption, but not concrete targets, outcomes of policies with respect to these targets, and specific information on risks and impacts (20% on average).
Only 22% of companies provide their key performance indicators in summarised statements, in a marked contrast with the way financial indicators are presented.
Just 13.9% of companies report on alignment of their climate targets with the Paris agreement goals (ie, to keep global warming well below 2 degrees Celsius).
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.
Only 6.6% clearly consider the risks with regard to the transition to a well below 2 degree Celsius scenario, and just 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 EU 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.
‘We need to be careful not to provide criteria that are too detailed or to over-regulate companies, but there is a clear space and need for very targeted sector-specific clarifications on mandatory requirements for reporting.’