The Financial Conduct Authority (FCA) and Financial Reporting Council (FRC) have published set of recommendations for companies reporting on climate change, after finding some had not sufficiently reported in line with the Taskforce for Climate-related Disclosure (TCFD).
In a statement the two bodies said since being required to report in line with the TCFD, companies had made “significant steps forward”. But a deeper dive into company reports revealed disparities.
FRC finds lack of net-zero clarity
The FRC reviewed 25 larger companies more impacted by climate change. It found companies to generally be disclosing Scope 1 and 2 emissions metrics, with fewer reporting Scope 3. Similarly net-zero targets lacked clarity, with companies not always providing historical data and explanations, making it “hard to understand how a company is progressing against its targets”, the report said.
It also found although companies were able to provide information about the governance of climate-related matters, fewer were able to explain how their boards take these into account. This comes just weeks after the FRC published a paper outlining how it will deliver governance reforms, including revising existing codes, strengthening auditing and accounting standards and setting expectations to drive behavioural change.
See also: – FRC outlines corporate governance reforms
In companies’ assessments of climate-related risks and opportunities, the FRC found some focused on opportunities at the expense of risks, or again didn’t factor these considerations into planning.
“Risk management of climate-related matters was integrated into the overall risk management process of most companies,” the FRC report said, “but it was not always clear how climate risks had been prioritised against other risks, and materiality was often not well explained.”
Its advice to companies to improve their reporting was to:
- Provide more granular information about the effect of climate change on different business sectors and geographies.
- Balance the discussion of climate-related risks and opportunities appropriately.
- Link climate-related disclosures to other risk management and governance processes.
- Explain how they have decided which climate-related information should be disclosed.
- Explain more clearly how the effects of different global warming scenarios, and their own net-zero commitments, may affect the valuation of their assets and liabilities.
FCA finds companies lag on climate strategies
The FCA reviewed 170 companies at a high level and 30 companies in more detail, and similarly found instances where companies said they had made disclosures consistent with the TCFD’s recommended disclosures when it appeared they had not. It is considering these cases in more detail and may take action as appropriate.
Of companies self-reporting consistency with the TCFD, the FCA marked most down on their description of the resilience of their strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario. It found 41 companies – or 24% of those it looked at – were actually not consistent with the TCFD on this.
| Recommended disclosures | Indicated as consistent | Indicated as not consistent |
|---|---|---|
| Governance a)Describe the board’s oversight of climate-related risks and opportunities. Governance b)Describe management’s role in assessing and managing climate-related risks and opportunities. | 167 (98%) 168 (98%) | 4 (2%) 3 (2%) |
| Strategy a)Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term. Strategy b)Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning. Strategy c)Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario. | 150 (88%) 143 (84%) 130 (76%) | 21 (12%) 28 (16%) 41 (24%) |
| Risk Management a)Describe the organisation’s processes for identifying and assessing climate-related risks. Risk Management b)Describe the organisation’s processes for managing climate-related risks. Risk Management c)Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management. | 164 (96%) 164 (96%) 167 (98%) | 7 (4%) 7 (4%) 4 (2%) |
| Metrics and Targets a)Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process. Metrics and Targets b)Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas (GHG) emissions and the related risks. Metrics and Targets c)Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets. | 147 (86%) 152 (89%) 139 (81%) | 24 (14%) 19 (11%) 32 (19%) |
| Total self-reported disclosures | 1691 (90%) | 190 (10%) |
It also found while approximately 80% of the companies making net-zero statements included a target date to achieve net zero in the window 2035 to 2060, many of the net-zero statements referencing 2030 or earlier only covered the company’s direct business or operations, rather than the entire value or supply chain.
“Looking ahead to disclosures for the 2022 reporting period, where you are making net-zero commitments, we encourage you to consider the TCFD’s guidance on metrics, targets and transition plans and to ensure that your disclosures are not misleading,” the FCA said.
