Blog - Changing Climate : Changing Reporting
Blog by Phil Fitz-Gerald, Director of the Financial Reporting Lab
The changing climate will impact our lives and the societies we live in. There are many calls to action for all parts of society to respond, and do so quickly. The Financial Reporting Council’s (‘FRC’) Financial Reporting Lab (‘the Lab’) is playing its part in calling for companies to be more transparent on how they are addressing climate risk. Whilst reporting, in itself, cannot limit the effect of climate change, transparency of how companies are responding to this risk provides stakeholders with better information and may guide how they interact with a company: whether it is investors deciding whether to invest; employees deciding which companies they would like to work for; customers deciding which products to buy; or suppliers deciding which company to sell their products to. At the FRC we firmly believe that reporting changes behaviour.
So what is the FRC doing to encourage transparency of climate related risk? Well firstly, provision 1 of the new UK Corporate Governance Code asks boards to describe “how opportunities and risks to the future success of the business have been considered and addressed, the sustainability of the company’s business model and how its governance contributes to the delivery of its strategy”. Following government legislation to require all large companies to report on section 172 about promoting the success of the company and explaining how, in so doing, they have had regard to their stakeholders, the FRC’s Guidance on the Strategic Report was also updated earlier this year. The guidance encourages companies to consider the broader matters that impact company performance over the longer term. This includes climate-related risk when material. The FRC’s Corporate Reporting Review team is also considering specific matters relating to client risk disclosures of certain companies that ClientEarth has brought to its attention.
Of course, reporting on the effects of climate is not easy. It’s not all about recording transactions, assets, liabilities and profits – it’s about making assessments of an uncertain future and how this will affect business models, future performance and society more generally. Frameworks such as the Task Force on Climate-related Financial Disclosures can help and are certainly affecting reporting practice in the UK. But this is still a developing area. That is why the Lab has started a major project on climate (and workforce) reporting. All Lab projects look to find market-led solutions to reporting matters and provide practical examples of how these solutions can be implemented. It does this by inviting companies and investors to participate in its projects and creating a safe environment to explore the challenges and issues to find innovative solutions.
Since issuing its call for participants a significant number of companies, investors and other interested parties have expressed an interest in participating. However, the Lab would welcome others. It is not a big time commitment and participation can have a real impact on reporting in this important area.
The scope of the project will develop in light of the contribution from those that participate. However, it is likely to:
explore how companies understand, measure and report on climate change and workforce issues, especially in the context of new reporting requirements;
examine how investors use this information in their decision-making process and consider whether the emerging reporting meets investor needs;
identify where best practice reporting of material information overlaps with relevant frameworks under which companies may develop their reporting, for example, the Task Force on Climate-related Financial Disclosures’ recommendations;
discuss which areas of reporting are most challenging for companies;
consider the extent to which lessons can be learnt from emerging international reporting practice; and
highlight best practice in company reporting.
More details of the project and how you can get involved can be found at the following link:
Still unsure about the Lab’s approach? Have a look at the video at the link below, which explains what the Lab is and what it is like to participate in a project.
Transparency of reporting on the risk and opportunities presented by climate change will allow stakeholders to make more informed decisions on the sustainability of companies. The FRC is playing its part in encouraging better reporting – companies and investors can help by joining the Lab’s project.