Firms and auditors face a climate reporting shakeup as the industry regulator the Financial Reporting Council (FRC) has announced a major review of how companies and auditors assess and report on the impact of climate change. The FRC has said it intends to review the extent to which UK companies and auditors are responding to the impact of climate change on their businesses to ensure reporting requirements are being met.

“The review will consider how the quality of information can be improved to support informed decision-making by investors and other stakeholders,” the FRC said. It plans to monitor how companies and their advisers fulfil their responsibilities and encourage better practice.

“Not only do Boards of UK companies have a responsibility to report their impact on the environment and the risks of climate change to their business, but investors expect them to operate sustainably,” Sir Jon Thompson, FRC’s chief executive officer, said:  “Auditors have a responsibility to properly challenge management to assess and report the impact of climate change on their business.”

Plans

Under the plans, FRC will be:

• reviewing a sample of company reports and accounts across industries to assess the quality of their compliance with reporting requirements in relation to climate change;
• assessing a sample of audits to review how auditors are ensuring the impact of climate risk has been appropriately reflected in company reports and accounts, including the key areas of judgement and related disclosures;
• assessing the resources available within audit firms to support audit teams in evaluating the impact of climate change on audited entities;
• evaluating the quality of disclosures under the UK Corporate Governance Code regarding risk, emerging risk and long-term factors affecting their viability;
• evaluating whether the Financial Reporting Lab’s recommendation for companies to report in line with the Task Force on Climate-related Financial Disclosures framework has been adopted, highlighting developing good practice.

The FRC will also consider how investors are addressing the climate challenge in the stewardship of their investments and in their response to systemic and market risks when it monitors the first reports under the new Stewardship Code, which will be issued from the beginning of 2021.

Firms and auditors could have their work cut out. “The poor quality and comparability of corporate disclosures hinder the efforts to scale up sustainable finance as investors do not have reliable information to inform their decisions,” according to a new report by The Alliance for Corporate Transparency. “This leaves major financial risks stemming from sustainability challenges, especially climate change, unaccounted for in investor and corporate strategies, as well as important social and environmental impacts unaddressed.”

The research into 1,000 European companies found that reports focused on presenting general policies and commitments in 80-90 per cent of cases for key issues such as climate, human rights, and anti-corruption. But failed to provide concrete targets, outcomes of policies with respect to these targets, and specific information on risks and impacts.

Climate reporting findings

• 13.9 per cent of companies reported on alignment of their climate targets with the Paris agreement goals
• 23.4 per cent provided specific information that allowed readers to understand the climate-related risks they are facing. Only 6.6 per cent clearly considered the risks with regard to the transition to a well below 2 degree Celsius scenario.
• Only 13.4 per cent of financial companies provided details on the exposure of their portfolios to the most polluting sectors.