Tick box approach to climate-related reporting criticised

The European Financial Reporting Advisory Group (EFRAG) has published advice on how to improve climate-related reporting, particularly to stop the use of boiler plate reporting 

The review provides an analysis of the current state of climate-related reporting from 150 European companies and assesses their level of maturity in implementing the taskforce on climate related financial disclosures (TCFD) recommendations. 

The project addressed two areas: a general review of climate-related disclosures and an in-depth review of scenario analysis reporting, based on a review of good practice conducted by its European Corporate Reporting Lab.

Climate-related financial disclosures are still at an early implementation stage and there is room for improvement, even among more mature reporting companies. The lab did identify some improvements in the quality of disclosures compared to the 2017 reporting cycle.

However, it said some companies still consider the taskforce on climate related financial disclosures reporting as a pure compliance exercise and miss the opportunity to perform a genuine analysis and report on both their resilience to climate-change risks and the impact of their strategy on the environment.

Companies rarely offer enough explanation about if and how their business model and strategy are resilient to climate risks and how they will adapt to a low-carbon world or to increased physical risks.

They are generally good at reporting the climate-related policies they have in place, but less good at reporting how they either monitor or perform against their policies and manage risks.

While some companies are leaders in specific aspects of climate reporting, the lab said it is challenging to find companies that show a high level of sophistication on all aspects of climate-reporting.

In general, the project task force on climate-related reporting found that companies’ disclosures are not always sufficiently underpinned by supporting information or evidence.

For example, there is sometimes a lack of clear identification and description of climate-related risks in the short-, medium- and long-term.

The review also identified that various sections of companies’ reports are not always clearly articulated or well-connected, making it difficult for users to get a complete picture of companies’ approaches to assessing and managing climate-related risks and opportunities.

Based on the sample of companies reviewed, it was observed that there is a lack of references to national and international commitments such as the Paris Agreement.

It recommended companies should avoid disclosing generic information; reporting without a prior materiality assessment; and reporting without a common narrative.

Of the four taskforce on climate related financial disclosures recommendations’ thematic areas (governance, strategy, risk management, and metrics and targets), the project task force on climate-related reporting found companies are most comfortable reporting on metrics and targets, while the other thematic areas are at a less advanced stage of analysis and reporting.

Scenario analysis is considered as a difficult exercise as the required information is scarce and patchy (eg, parameters for certain technologies, local data for climate variables), uncertain (eg, development of policies), and it is challenging to connect reference climate models to either companies’ financial information or business models.

Some approaches to enable appropriate scenario modelling are being developed, but companies would benefit from having further guidance, and the development of sectoral guidance could be helpful.

Furthermore, the uncertainty about how public policies will develop in the years to come, including the possible introduction of a carbon tax and carbon border adjustments, makes the scenario analysis exercise particularly uncertain.

The review stated that many companies experience challenges in complying with the variety of disclosure requirements and guidance that have arisen during the last years, most of which are not aligned or coordinated, creating a burden for both preparers and users.

Michèle Lacroix, chair of project task force on climate-related reporting, said: ‘The deliverable provides views of cutting-edge reporting to preparers, users and other stakeholders interested in climate-related disclosures.

‘We hope that our report will be beneficial to the stakeholders and will contribute to narrowing differing expectations between preparers and users of climate disclosures.’

The report also analyses the climate-related reporting elements of the EU Non-financial Reporting Directive and the related European Commission non-binding guidelines.

How to improve climate-related reporting – a summary of good practices from Europe and beyond

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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