Latest developments in corporate reporting: climate-related reporting – ownership and responsibility to meet today’s demands

The past decade or so has seen an inexorable increase in interest in and expectations for information on the impact of climate on companies and companies on climate.  In the UK this has taken a leap forward in the past year, with the introduction of mandatory climate reporting first for premium listed companies, then standard listed ones and, more recently, AIM and a number of larger private companies.  These added pressures, plus the more recent political focus on energy prices and cost of living, makes this an issue that just isn’t going away.

Despite the growth in expectations and detail and depth of reporting, this is still a new area.  There are veteran companies and industries surely, but the processes, systems, and governance of reporting do not, for the most part, have the maturity of those delivering financial information.  This cannot continue.

In its recent review of compliance with the TCFD regulations, the FCA notes that it considers that its first listing principle – that listed companies should have systems and controls sufficient to allow them to comply with reporting obligations – extends not just to financial reporting systems, but also to establishing and embedding climate-related reporting data. 

Boards therefore need to think carefully about: whether their existing reporting systems are up to scratch, whether the management expertise is there to understand the data produced, and whether the governance infrastructure has kept up with the new information so that there are appropriate checks and controls over the data produced.  If the expertise is not there, the board needs to consider how it will be acquired or built.  If the expertise is already there, the board needs to make sure that considering the data is on the appropriate agendas – usually that of the audit and risk committee – and, also, that it has considered - and is willing to report on - what main board time needs to be devoted to it. 

Looking at the FCA review and the FRC’s review on the same area it is clear that, while there has been considerable latitude allowed to companies for gaps in compliance in the first year. This will not be indefinite. The bar continues to rise, both because more complete compliance is expected of companies and because the rules have been updated following the revision of the TCFD rules last year.

A few points then on content of climate reporting, and what this suggests for the systems that produce it:

Growth: there’s a lot more TCFD reporting than there was even one year ago.  While there were a fair number of companies voluntarily adopting TCFD for the 2000 reporting year, the number has unsurprisingly increased drastically given the obligation to report for premium listed companies.   The number of reporters will increase further as the reporting obligation rolls out to later year-ends, standard listed companies, and AIM and high turnover companies.   Despite this progress, however, investors want more detail, greater comparability, and greater reliability and assurance.

Granularity and explanation:  One of the areas noted in both the FCA and TCFD reports is the level of granularity of reporting.  Climate KPIs are still typically reported on a whole company basis.  For most companies, financial matters would typically be reported segmentally or in greater detail.  The current whole company basis is both insufficient for investors to assess risks and suggests that climate-related data is not used in the management of the business.  Changes in non-financial KPIs are also often explained poorly or not at all, again suggesting that information is not integrated with the company’s reporting systems.

Risks; impact and materiality:  While climate-related risks and opportunities are identified, it is much less common to see even a partially quantitative indication of potential impact.  In most cases, investors would expect some quantitative consideration to be part of financial and strategic planning and some reporting of this to be possible.

Scope 3 reporting:  This is possibly the most difficult area.  Scope 3 emissions, that is those from sources such as products bought in as supplies or raw materials or emissions caused by your products in use, can form the majority of emissions for many companies and, as a result, pose the greatest risk or impact to a company’s business model.  This could occur due to carbon taxes on your inputs, restrictions on supplies, or taxes or restrictions on use of the company’s products.  As such, both investors and corporate and individual customers can be concerned with these.  Both the energy and carbon reporting regulations and the TCFD framework recommend reporting of relevant scope 3 data.  The data for this is, however, not in your own company’s control.  You may not, as a customer, have sufficient clout to oblige suppliers to give you this data, or it may simply be impossible to obtain directly for commodities, resulting in sweeping estimates being required.  Even where they have data, companies are understandably cautious about its quality.  Nevertheless, the level of reporting here will be increased, and boards and subcommittees need to gain an understanding of the data available and seek ways of improving or assuring this where possible.

International regulation

The UK is not the only jurisdiction introducing regulation in this area.  The SEC is introducing TCFD-based reporting and Europe is well advanced in its preparations for the Corporate Sustainability Reporting Directive (CSRD).  If TCFD reporting seems daunting, CSRD reporting will seem more so.  The reporting standards are far broader, covering not only climate change, but also other environmental impacts such as biodiversity, and a range of social impacts.  While the first companies to have to report (in 2025 on 2024) will be companies listed in the EU with more than 500 staff, this will extend over subsequent years to large companies and, by 2029, those with trade over a threshold in the EU even if not domiciled there.

In conclusion

This area is not going away.  Current reporting systems for producing climate-related data often lack the maturity of those for financial data, but boards will increasingly be held responsible for their accuracy and relevance.  Both non-financial reporting systems and the monitoring and governance of those systems need to take a step forward to recognise this.

Published October 2022