Why should companies embrace climate change reporting?

18 February 2020
Climate change – or rather, what companies are doing about the likely impacts of climate change on their businesses – has quickly risen to the top of the board agenda.

Investors are becoming increasingly interested in climate change governance matters and will often review these aspects before deciding whether to invest in a company. For example, in his annual letter to chief executives, Blackrock CEO Larry Fink wrote that climate change had become a defining factor for companies’ long-term prospects. 

Ahead of the next reporting year, companies will need to ready themselves for increased disclosures to meet investor expectations as well as growing regulation. 

What climate change reporting do I need to be aware of?

While there is no current requirement to report on ‘climate change’ specifically, there are some regulations that may encourage or require, depending on the company, disclosure of climate-related issues. 

On 2 July 2019, the UK Government announced in its Green Finance Strategy the expectation that listed companies and large asset owners should disclose in line with the Task Force on Climate-related Financial Disclosures (TCFD) framework recommendations by 2022.

This framework suggests reporting under four core elements:

  1. Governance
    The organisation’s governance around climate-related risks and opportunities.
  2. Strategy
    Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material.
  3. Risk management 
    Disclose how the organisation identifies, assesses, and manages climate-related risks.
  4. Metrics and targets
    Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

Reporting guidance 

The Financial Reporting Lab offers guidance on the recommended disclosures under each area:

  1. Governance
    • Describe the board’s oversight of climate-related risks and opportunities. 
    • Describe management’s role in assessing and managing climate-related risks and opportunities.
  2. Strategy
    • Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term.
    • Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning.
    • Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.
  3. Risk Management
    • Describe the organisation’s processes for identifying and assessing climate-related risks.
    • Describe the organisation’s processes for managing climate-related risks.
    • Describe how processes for identifying, assessing, and managing climate-related risks integrate into the organisation’s overall risk management
  4. Metrics and Targets
    • Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process.
    • Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks.
    • Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets.

In addition to these requirements, the FCA has also stated that it intends to publish a consultation paper in early 2020 that will propose new disclosure rules for listed and regulated companies, aligned with these TCFD recommendations, on a “comply or explain” basis. 

What steps do I need to take to prepare?

As reporting on climate change is relatively new for most companies and investors, reporting best practice is still developing.

Listed companies should pay close attention to this issue, with monitoring organisations such as Thomson Reuters already announcing plans to track disclosures on climate change, greenhouse gas emissions and carbon emissions as well as statements on voluntary disclosures against the TCFD recommendations.

There are some practical steps that companies can take such as looking to integrate real-life examples and case studies within their 2020 annual reports on the environmental challenges the company has faced and the steps they have taken to overcome them.

Given the increasing scrutiny on annual report disclosures, it may be advisable to engage a third-party expert to review the existing structure of your annual report. They could also provide tips about how you can incorporate climate change reporting into your discussion of risks, strategy, culture and governance.