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Investors are increasingly seeking detailed disclosures from companies about how they intend and expect to achieve targeted reductions in greenhouse gas (GHG) emissions and net zero targets. Both the FRC and FCA—in their thematic reviews of Taskforce on Climate-related Financial Disclosures reporting—identified better connectivity between TCFD and financial disclosures as a key area for improvement.

The FRC Lab Report: Net zero disclosures notes that improvement in reporting is still required, as “reporting is too often aspirational and high level” and, to that end, identifies three “inherently interconnected” elements that investors are seeking to better understand from a company’s net zero disclosures:

1. Commitments: Describe the company’s level of ambition, scope, nature and timing of its commitment to company disclosures. Companies should clearly define the types of GHG emissions and reductions it is committed to; the boundaries and timelines of each commitment; and the types of GHGs, regions or operations included or excluded in each commitment.

2. Impacts: Explain the current and expected impacts of a company’s net zero and GHG reduction commitments on its company’s strategy and business model, such that investors can assess whether the company’s plans are robust and credible for the future. Disclosures should include analysis of the company’s present transition plans, assumptions, uncertainties, and risks and opportunities relating to its commitments, such as its reliance and dependency on future public energy and infrastructure policies, developing future technologies and critical supply chains. Include disclosure against the potential future costs of the company’s commitments, including the proportions of overall planned capex used on low carbon assets and technology and the proportions of future R&D expenditure used on low carbon technologies and solutions.

3. Performance: Explain how performance in the short, medium and long term is being measured and provide information on the pace of progress against net zero targets. Progress is likely to be seen in rapid and significant, not smooth and linear, reductions in GHG emissions at key changes, such as when high-emission assets are decommissioned or new green technology is used. Investors prefer a company to disclose data that connects to its business model and allows it to monitor the progress of different business lines and regions of the business and what controls and governance procedures are in place.

Companies are encouraged to apply this data against consistent, established frameworks that align with the latest climate science to set net zero targets, such as the GHG Protocol to measure their GHG emissions and the Science Based Targets initiative (“SBTi“) frameworks.

The report finds that effective and robust processes are central to enabling companies to better understand their progress, iterating and achieving their net zero commitments over the long term, and recommends that the above key elements should be considered and reported on as part of a four-stage iterative process.

1. Define the commitment:
– what can and will be reduced (both internal and external to operations) and what offsetting approaches can be used?
– what interim targets should be set?
– how should these goals be communicated internally and how will corporate culture support achievement of these goals?

2. Assess the impact (of the company’s commitment):
– how might business strategy need to change?
– what gaps exist within current operations and processes, and what resources and policies (for example, re business travel and supplier relationships) are needed?
– how can the commitment be embedded into decision making?
– how much will it cost and how will it be funded?

3. Measure progress:
– what systems, controls and processes (including internal review processes) are in place or should be put in place to measure and monitor progress?
– is there sufficient access to relevant data, including from third parties?
– how do measures link to individual objectives?

4. Refine the approach:
– what lessons have been learned already and what can be improved upon?
– do any commitments need to be redefined? For example, should progress on certain items be accelerated?
– is external review also needed?
– how will lessons be shared with the wider workforce?

Whilst the report provides helpful, specific suggestions and tips, and provides a framework for making investor friendly disclosure on net-zero targets, it also makes the following caveats:

• Net-zero reporting is part of a developing area of broader climate-related corporate reporting, and the quality of reporting should only continue to improve as companies develop definitions, mature their processes, controls and data collection, and refine the scope of their commitments. The FRC expects that companies will improve their reporting from a ‘foundational’ level to a more ‘advanced’ level.
• The information highlighted in the report may not be relevant to all companies, and each company should consider on a case-by-case basis what is material to them and their business when preparing and drafting their disclosures.
• The suggestions in the report should not be viewed as a means of achieving ‘minimum compliance’. Companies should consider whether ‘advanced elements’ of disclosure may be applicable.

Next steps:

• The FRC will be looking for companies to improve on their reporting across the three ‘inherently connected’ areas of focus, such that improvement in one area should necessarily help to improve the other areas.
• Refer to the report (including applicable regulatory requirements and guidance further set out in Appendix 2 of the report) and the ‘example bank’ as useful sources of practical guidance when preparing your company’s net-zero disclosures.
• Whilst this report provides practical guidance, pay close attention to continued developments in investor and regulatory expectations and reporting requirements, for example: development of ISSB standards and proposals for the publication of transition plans in the UK; and further clarity on any local jurisdictional net zero commitments.

Further information:

Click here for a copy of the FRC Lab Report: Net zero disclosures.
Click here for a copy of the FRC Lab Report: Net zero disclosures – Example bank.
Click here for a copy of the FRC Lab Report: Net zero disclosures – Summary of findings.

This article was produced in association with White & Case UK’s Public Company Advisory team. Read their original alert here.

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