Newsflash – UK sets out net zero ambitions and announces step change in climate change reporting has been saved
Newsflash – UK sets out net zero ambitions and announces step change in climate change reporting
A coordinated set of announcements in November 2020 set out the leadership ambitions of the UK on reporting on climate change.
The FRC’s Climate Thematic Review
The FRC has completed a review of climate-related issues as they affect governance, reporting and audit, and the roles of a range of market participants. The review highlights the important roles that boards, companies, audit firms, professional associations and investors have to play in delivering society’s climate ambitions. As it is these groups who assess climate-related challenges, help to drive appropriate reporting to the market, equip accountants and auditors with relevant knowledge and the confidence to challenge, and encourage the behaviour and reporting they want to see.
While the FRC’s review highlights some examples of better practice, the overall message is that more needs to be done - by everyone. The key messages are as follows:
Boards - boards have a responsibility to consider the impact of their company on the environment and the likely consequences of any business decisions in the long term. The implications of climate change will affect a wide range of companies, and in developing a company’s strategic direction, boards should be taking into account all the possible effects of climate change. The detailed findings on governance can be found here.
Companies - corporate reporting should address the company’s impact on the environment, the resilience of its business model and the impact of climate change on its financial statements. For UK companies, the Government has pledged to reach ‘net zero’ by 2050, and in the Green Finance Strategy outlined its expectation that listed companies and large asset owners should be reporting using a framework established by the Taskforce on Climate-related Financial Disclosures (TCFD) by 2022 (see below for announcement from the FCA on the timing of implementation for all commercial premium listed companies). The detailed findings on corporate reporting can be found here.
Auditors - auditors need to test and, where necessary, challenge the board’s and management’s assessment of the financial statement implications of climate change. Expectations are developing rapidly, and whilst boards have the first responsibility to consider climate-related issues, auditors play an important role in challenging, testing, and improving the accounting for, and disclosure of, climate-related issues. The detailed findings on audit can be found here.
Investors - many investors are responding to the climate crisis by engaging with companies, governments and each other. This is a powerful market signal, and investors need to continue to integrate climate change into investment decision making. They must also consider their own reporting, as the Green Finance Strategy ambitions also apply to those in the investment chain. The detailed findings on what investors want to see can be found here.
Regulators and standard setters - in order to meet the needs of users the reporting framework must develop. The FRC will be working with domestic and international organisations as this work progresses over the longer term. In the shorter term, the FRC encourages UK public interest entities to report against the TCFD recommended disclosures and, with reference to their sector, using the Sustainability Accounting Standards Board metrics. Climate change will also be an area of ongoing focus for the FRC. The detailed findings on professional oversight can be found here.
The FRC’s announcement and all supporting papers are available here.
Veronica Poole, Global IFRS Leader and Head of Corporate Reporting at Deloitte:
“We welcome the FRC’s review of how companies and auditors assess and report on the impact of climate change. Investors are clear that climate related risks are material to businesses in all sectors, and expect companies to account for and disclose them appropriately in annual reports and financial statements. As auditors, we have an important role to play in assessing this by integrating climate related risks into the audit process. We acknowledge that this is an ongoing transition, and understand the importance of continuing to work with professional bodies, regulators and audited entities, to enhance confidence in the information provided to markets.”
FCA announcement on the recommendations of the TCFD
In a speech at the Green Horizon Summit on 9 November 2020, FCA CEO Nikhil Rathi, confirmed that, with effect for reporting periods beginning 1 January 2021, the FCA will be introducing rules requiring premium listed companies to make better disclosures about how climate change affects their business, consistent with the recommendations of the TCFD. This follows “generally positive feedback” on their consultation which closed last month. A full Policy Statement and final rules will follow by the end of the year. In addition, Mr Rathi confirmed that in the first half of 2021 the FCA will consult on extending the scope of these rules, and also on introducing TCFD obligations for asset managers, life insurers and pension providers.
Nikhil Rathi’s speech is available here.
The Chancellor’s announcement on environmental disclosures
The UK will become the first country in the world to make TCFD aligned disclosures fully mandatory across the economy by 2025, going beyond the ‘comply or explain’ approach following an announcement by the Chancellor on 9 November 2020.
The joint Government Regulator TCFD Taskforce has published a roadmap for implementing mandatory disclosures, many of which will come into force by 2023. The upcoming rules and regulations will capture a significant portion of the economy including listed commercial companies, UK registered large private companies, banks, building societies, insurance companies, UK authorised asset managers, life insurers, FCA regulated pension schemes and occupational pension schemes.
The full roadmap is available here.