Many companies are finding it difficult to detail their plans for transitioning to a low-carbon economy, according to the UK’s corporate governance watchdog, which reviewed climate reporting.
A thematic review from the Financial Reporting Council (FRC) also reveals that, while reporting in line with Taskforce for Climate-related Financial Disclosures (TCFD) requirements, companies struggled to offer clear disclosures about “concrete actions and milestones to meet targets”, while comparability between companies “remains challenging”.
According to Mark Babington, executive director of regulatory standards at the FRC, the review underlines the need for “clearer, more decision-useful disclosures”.
“We encourage companies to focus on explaining targets, action and any impacts on the financial statements.”
TCFD was made mandatory for UK premium-listed companies in January 2021 and for standard-listed companies from January last year.
However, it seems many companies are still coming to terms with their disclosure requirements and what they may mean for policy decisions.
While many have set “net zero” targets, metrics for tracing progress examined by the FRC “were sometimes unclear and explanations of performance were not always provided”.
The FRC called on companies to go back to the Transition Plan Taskforce to learn how to “articulate” targets and plans for transition. “Few companies currently publish and refer to separate transition plans, although many mention aspects of a transition plan.”
When it comes to comparability of greenhouse gas reporting it seems the issue is scope 3 emissions—those produced by an organisation’s supply chain. This seems due to “entity-specific metric definitions and reporting boundaries”.
Elsewhere, the FRC notes it is companies with “published transition plans” that are more able to “describe the concrete actions” taken to achieve specific targets.
TCFD is unlikely to be the last word in non-financial reporting for UK companies. In June, the International Sustainability Standards Board, sister body to the International Financial Reporting Council, issued its first two standards. The UK government pledged it would adopt ISSB standards in its Green Finance Roadmap, published in October 2021.
However, prime minister Rishi Sunak this week indicated he had cooled on climate policies, saying they should not impose “unnecessary” costs and must be “proportional and pragmatic”. There was even speculation that he might row back on some key climate policies, including the ban on new petrol and diesel cars from 2030. With a general election looming next year, Sunak may be heading towards a “populist” revamp of the government’s climate position.
In Brussels, lawmakers are about to pass two new reporting directives, the Corporate Sustainability Reporting Directive (CSRD), and the Corporate Sustainability Due Diligence Directive (CSDDD), both of which could have an impact on UK companies if they are doing business inside the European Union.
Meanwhile, US standard setters are working on their own climate risk reporting standards, which have garnered support from companies and investors from around the world.
The latest FRC report is testimony to the need for more progress on climate and environmental reporting. Though regulators may be at odds with a changing political landscape, there is no change for companies and their reporting responsibilities. Time to take the FRC’s advice on board.