Campaign group ClientEarth has called on businesses to treat the latest Financial Reporting Council letter to chief executives, chief finance officers and audit committee chairs as a chance to make much needed improvements to their climate-change reporting.
The letter sets out the FRC’s supervisory priorities for the coming year. They include reporting on the impact of climate change, the COVID-19 pandemic and the completion of the UK’s departure from the European Union.
ClientEarth climate finance lawyer Daniel Wiseman told IPE now is the time for both companies and regulators to face up to their responsibilities.
“The continued failure by companies to disclose material climate-related financial information to investors means they are likely breaching the law,” he said, adding that “global policies are rapidly realigning around reaching ‘net zero’ greenhouse gas emissions by 2050.”
He noted that “consequently, the pressure will increase for regulators to ensure that companies align their strategies and financial operations with the Paris Agreement goals”.
The FRC annual letter sets out what it said are the areas of financial reporting to which preparers must pay particular attention during the 2020/2021 financial reporting season.
The letter singles out five broad areas for close scrutiny over the coming year:
- the 2020 year-end reporting environment;
- insights and observations from monitoring work;
- insights and observations from thematic reviews;
- narrative reporting and corporate governance matters; and
- future developments.
On the specifics of climate change, the FRC said it expects companies to disclose a:
- description of their environmental policies;
- discussion of the impact of their business on the environment; and
- balanced discussion of how they are incorporating green targets into their business practices.
In relation to COVID-19, the FRC made explicit reference to the findings of two reports released in June and October by its Financial Reporting Lab on the subject of financial reporting during the pandemic.
The FRC said investors would expect companies to explain:
- currently available cash and other resources;
- key steps management has taken and intends to take in light of the pandemic;
- the longer-term impacts of COVID-19 on business model and strategy; and
- the board’s assessment of going concern and viability, as well as the methods, judgements and assumptions underlying those assessments.
As for Brexit, the FRC has urged preparers to “explain company-specific risks and uncertainties, including the potential impacts on different parts of the business and any effects on the financial statements”.
But it is on climate change that companies can expect to feel the heat over the next 12 months.
Tim Bush, head of governance and financial analysis with Pensions & Investment Research Consultants, told IPE there was reason to welcome the FRC directive.
He said: “There are some good relevant points here. The climate change issues are particularly sharpened given that decarbonisation is happening more quickly than expected given the falling costs of renewables.
“That means asset write downs and provisions for reclamation and decommissioning.”
Wiseman added: “If they do not want their risk disclosures to be viewed as greenwash – companies urgently need to develop a clear strategic vision for how their business will thrive in a zero emission world.”
Finally, the FRC has also devoted substantial attention to narrative reporting under section 172 of the Companies Act 2006.
Section 172 (s172) makes it the responsibility of a company’s management not only “to promote the success of the company” but also to consider stakeholders such as employees, suppliers and even the wider environment.
Those that want to see s172 more rigorously enforced argue it could cast a light on a wide range of corporate misconduct and environmentally damaging practices.
From 1 January 2019, UK companies have been required not only to comply with s172 but also to report expressly on their compliance with the requirement.
The FRC noted in its letter that “some companies were unsure as to whether they are required to prepare a section 172 statement”.