Companies fell short of explaining the opportunities they see in climate-related change, according to watchdogs examining the first round of annual reports using guidelines from the Task Force on Climate-related Financial Disclosures (TCFD).
Regulators at the Financial Reporting Council (FRC) are at pains to point out that the 25 premium listed companies they looked at were only in the first year of TCFD disclosures, which proved challenging, given the “complexities of data”. Companies have “generally risen to the challenge”, they report.
But there were issues to improve upon, including the use of “materiality”, the granularity of information and how climate change sits alongside other narratives about a company’s prospects.
The “balance” between reporting risks and opportunities—and the size of those opportunities—was also an issue spotted by inspectors.
“Some companies,” says the report, discussed opportunities arising from climate change and the transition to a low carbon economy, without specifying the expected size of the opportunity relative to existing, more carbon-intensive, businesses.
“We expect companies to ensure that the discussion of climate-related risks and opportunities is balanced, and to consider linking the description of climate-related opportunities to any technological dependencies.”
Sarah Rapson, the FRC’s executive director of supervision, praised companies that had “stepped up” their efforts on reporting climate-related issues but added “there is still a lot of room for improvement” and emphasised regulators are watching things develop.
“Together with the FCA (Financial Conduct Authority) we will continue monitoring and supporting companies to make those improvements going forward,” she added.
What, but not how
There are a number of lines in the report that might causes readers to raise an eyebrow. Deep in the text is a note shareholders may well find interesting. Most companies, it says, provided “some” detail on the impact of risk and opportunities they had identified “but fewer provided detail of how they impacted the business strategy and financial planning”. If that kind of reporting continues, shareholders may start asking questions.
Here’s another. Several companies mentioned “new technology” that would help with emissions or climate targets. However, companies did not always make the “source” of the tech clear. Elsewhere, companies provided “vague” explanations of how they would respond to climate impact on their supply chains.
As for the other major areas in need of improvement, the FRC and FCA worried that some companies provided “high-level, generic information” about climate change with inadequate explanations of the “potential impact on different businesses, sectors and geographies”.
Inspectors were concerned that companies “did not always explain how they had applied materiality to their TCFD disclosures…”, a problem when trying to gauge their importance.
There was also anxiety about how companies linked TCFD to other narrative reporting. The FRC highlights this point by suggesting that TCFD “scenario analysis” could be linked to discussion of a company’s business model, a topic no doubt of substantial interest to shareholders.
It is early days. The UK was the first country to mandate TCFD reporting and, by any measure, implementation according to its tenets and guidance is a hefty piece of work. Its outcomes, if arrived at honestly, possess the potential to shock.
However, it goes without saying that shareholders and other stakeholders will want to know the climate change opportunities and, most of all, how business models and strategies might change or be affected. Sounds like annual TCFD reporting, in most cases, is some way from achieving that particular goal.