The pressure on companies to disclose more information about their climate-related issues was stepped up this week with a report from a UK watchdog revealing investor disappointment about the current state of reporting.
The Financial Reporting Council (FRC), the UK’s corporate reporting regulator, said investors believe companies are falling short on reporting climate risks and opportunities.
Among other disclosures, investors want to know how boards “consider and assess” climate and how it could change their business models, or whether they remain sustainable.
According to Sir Jon Thompson, chief executive of the FRC, investors are “rightly” demanding more information from companies.
“As societal and investor expectations evolve, alongside the regulatory environment, it is clear companies need to rapidly increase their transparency and improve their reporting to meet this demand.”
There is a growing demand for companies to report using guidelines published in 2017 by the G20’s Task Force on Climate-related Financial Disclosures.
The UK government has also set a target to bring greenhouse gas emissions to net zero by 2050.
One investor told researchers from the FRC’s Financial Reporting Lab: “Is climate change a material risk? You can only tell that once you’ve looked at the materiality.
“Even low emitters may have exposure to vulnerable regions, and I expect companies to be thinking about it and at least doing a process of identification.”
Another said: “It’s not necessarily all about the numbers. I want to know they’re thinking about the issues of climate change, as it is what I would be worried about if I was running the business.”
Evolving expectations
ClientEarth, a campaign group that has attacked the quality of corporate reporting in relation to climate, said “regulators must crack down” on companies and their reporting.
“The report shows how rapidly investor expectations and associated legal requirements are evolving in this area,” says Daniel Wiseman, a lawyer with ClientEarth.
“Reporting in line with TCFD [Task Force on Climate-related Financial Disclosure] is now the basis expectation. Companies reporting on alignment of their strategy with the Paris Agreement must urgently become the norm.”
The TCFD found that only a quarter of companies use the “fuller set”—six or more—of its 11 recommended disclosures. and only 4% of companies made disclosures aligned with ten or more of the guidelines.
There is also concern about the number of companies using “scenario analysis”, or reporting on the physical risks posed by climate change, as well as the transition risks. It also found that the quality of reporting across companies is “uneven”.
In a recent speech, Mark Carney, governor of the Bank of England, warned companies they must prepare for the transition.
“Those that fail to adapt will cease to exist. The longer the meaningful adjustment is delayed, the greater the disruption will be.
“Like virtually everything else in response to climate change, the development of a more sustainable financial system is not moving fast enough for the world to reach net zero.
“To bring climate risks and resilience into the heart of financial decision-making, climate disclosure must become comprehensive, climate risk management must be transformed, and investing for a two-degree world must go mainstream.”
