Insights

Climate Change – Planet Earth does not have time for excuses!

Financial Reporting Brief August 2019 

This month’s article, 'Climate Change – Planet Earth does not have time for excuses!', comments on continuing efforts being made to respond to and to report on the challenges and the actions needed.

The hottest topic in business and corporate reporting in recent times is climate change. There is a multitude of developments in the area as a response to the major concerns that are present throughout the global economy and eco-structures.

With record temperatures globally, we have in recent months seen such extremities as freak heat in the Canadian Arctic, crippling droughts in parts of Africa and forest fires that forced thousands of holidaymakers to abandon campsites in southern France.

The Irish government has published its Climate Action Plan in June reflecting the central priority climate change will have in our political and administrative systems into the future. The Plan sets out governance measures to be taken including carbon-proofing our policies, establishment of carbon budgets, a strengthened Climate Change Advisory Council and greater accountability to the Irish goverment.

Ireland would do well to follow the lead taken in the UK which has declared an environmental and climate emergency, committing to ‘net-zero’ greenhouse gas emissions by 2050, which means in effect eliminating carbon footprint with a near absence of fossil fuels and an economy built on sustainability.

Climate change is likely to drive some of the most profound changes to businesses in our lifetimes. Impacts on products and services, supply chains, loss of asset values and market dislocation are already being caused by more frequent and severe climate-related events. Humanity is recognising the challenges being faced and the drastic and rapid actions we all must take in order to protect our planet and our own livelihoods.

There have been a number of reporting and other developments recently, including:

  • European Commission guidelines on reporting climate – related information
  • The Task Force for Climate - related Financial Disclosures ("TCFD") Implementation Guide
  • The TCFD Status Report

European Commission Guidelines

The new guidelines are intended to :

  • accompany and be consistent with the EU Non-Financial Reporting (NFRD) Directive published in November 2014; 
  • supplement the general guidelines on non-financial reporting published in July 2017, which are still applicable; 
  • integrate the recommendations of the TCFD published in June 2017.

The guidelines are based on proposals from the Technical Expert Group (TEG) on Sustainable Finance published in January 2019, and are intended for use by companies that fall within the scope of the NFRD – large listed companies, banks and insurance companies with more than 500 employees.

The principal contents of the guidelines on climate reporting are:-

  • Explanation of key concepts in relation to reporting climate information under the NFRD, including materiality, climate-related risks, opportunities and natural capital dependencies;
  • Proposals for what to report regarding the climate under each of the key reporting areas identified in the NFRD – business model, policies, outcomes, risks and indicators; 
  • An annex with further guidance for banks and insurance companies;
  • An annex explaining how the reporting requirements of the NFRD can be combined with the recommendations of the TCFD.

Companies are expected to exercise their own judgement when deciding which of the disclosures to use. They should take account of the principles of good non-financial reporting in the NFRD, including the principles about disclosed information being (a) material, (b) fair, balanced and understandable, and (c) comprehensive but concise.

Companies should be able to use the new guidelines for reports published in 2020, covering financial year 2019. 

Principles to Practice

The Sustainability Accounting Standards Board (SASB) and the Climate Disclosure Standards Board (CDSB) have jointly released the TCFD Implementation Guide intended to help companies to more effectively take the TCFD recommendations from principles to practice. This is in response to the ‘implementation gap’ many companies have concerns about regarding the TCFD recommendations released in June 2017. The guide focuses primarily on annotated mock disclosures – a direct response to feedback from reporting companies who have been seeking out clear guidance to ‘show them what effective climate-related disclosure looks like’.

The Guide yields greater insight into the material climate-related financial risks and opportunities they face, equipping investors with reliable, comparable decision-useful information, and enhancing the resilience and stability of global capital markets to drive sustainable, long-term economic development.

Other relevant Guidance published recently includes that of a group of twenty institutional investors brought together by the UN Environment Finance Initiative (UNEP FI) to help assess how climate change and climate action could impact investor portfolios around the world. These assessments enable investors to be more transparent about their climate-related risks and opportunities in line with the TCFD recommendations. They will also help investors contribute to and benefit from the transition to low-carbon and climate-resilient economies. A transition to a low-carbon economy means that emission-intensive companies will become less competitive, and changes will present unprecedented risks – and opportunities – to institutional investors and other financial institutions who are exposed to these companies. Interesting findings from the studies undertaken by the group of investors include that transition to a low-carbon economy could cost the top 500 global investment managers up to 13% of overall portfolio value – a value loss in excess of $10Bn.

TCFD Recommendations - Implementation Status

The TCFD which was established by the Financial Stability Board in 2015 published its recommendations in June 2017 on climate-related financial disclosures. The recommendations are structured around four thematic areas - Governance, Strategy, Risk Management and Targets/Metrics.

The recommendations are based on its seven principles for effective disclosures which are

  • Disclosures should represent relevant information
  • Disclosures should be specific and complete
  • Disclosures should be clear, balanced and understandable
  • Disclosures should be consistent over time
  • Disclosures should be comparable among companies within a sector, industry or portfolio
  • Disclosures should be reliable, verifiable and objective
  • Disclosures should be provided on a timely basis

The TCFD has recently published a Status Report which is based on a review of over 1,100 companies from 142 countries as to the extent to which companies in their 2018 reports included information aligned with the core TCFD recommendations. The main overall findings of the Report are

  • Disclosure of climate-related financial information has increased since 2016, but is still insufficient for investors. 
  • More clarity is needed on the potential financial impact of climate-related issues on companies. 
  • Of companies using scenarios, the majority do not disclose information on the resilience of their strategies. 
  • Mainstreaming climate-related issues requires the involvement of multiple functions.

The TCFD believes the success of its recommendations depends on continued, widespread adoption by companies. Through widespread adoption, climate-related risks and opportunities will become a natural part of companies’ risk management and strategic planning processes.

Mr Michael Bloomberg, Chair of the TCFD, comments in his letter with the Report – ‘Progress must be accelerated. Today’s disclosures remain far from the scale the markets need to channel investment to sustainable and resilient solutions, opportunities and business models. I believe in the power of transparency to spur action on climate change through market forces.’

Conclusion

Deloitte has taken a joint initiative with the Institute of Chartered Accountants in England and Wales (ICAEW) designed to help businesses and finance professionals learn more about tackling climate change. A key feature of the programme is learning about considerations for financial statements and how to translate climate change effects into tangible measurements. The programme sets out the business case for action and practical steps for change, with the principal goal to help companies place their climate change response as a key element of their business models. Read more here.

What's New? Monthly Reporting Pack – August 2019

Irish/UK GAAP & Related Developments

FRC concludes 2018/19 review of FRS 101 and proposes limited amendments to FRS 102

FRC statement on the Government’s Green Finance Strategy

FRC issued a consultation on proposed changes to the UK’s Ethical and Auditing Standards

IFRS & Related Developments

European Banking Authority publishes IFRS 9 roadmap, launches IFRS 9 benchmarking exercise

European Financial Reporting Lab consults on future projects

IASB publishes proposed amendments to IAS 12

ESMA issues statement on the application of IAS 12

EFRAG publishes a feedback statement on its early-stage analysis of the FICE discussion paper

EFRAG publishes a feedback statement on its discussion paper on non-exchange transfers

Recent sustainability and integrated reporting developments

CRD position paper on transparency and accountability

Updated IPSAS-IFRS alignment dashboard

Legal & Regulatory Developments

ESMA updates ESEF Reporting Manual

IAASA publishes 2018 Profile of the Profession

ESMA publishes 23rd enforcement decisions report

Publications

FinSight - Insights for the Financial Services and Real Estate Industries in Ireland

After the first year of IFRS 9

Financial Markets Regulatory Outlook 2019 - 10 years on from the crisis

Newsflash – FRC statement on the UK Government’s Green Finance Strategy

Culture in the Financial Sector - Why is it important?

Global perspectives for private companies: Agility in changing markets

Extended enterprise risk management survey 2019

Investing in Ireland - Your move in the right direction

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