Watchdog orders UK firms to improve climate accounting in 2021

Michael Holder
clock • 3 min read

Companies are routinely 'not meeting investor needs' on climate and environmental data in annual reports, Financial Reporting Council warns

British firms have been told to improve their accounting for climate and environmental risk next year by the UK's auditing watchdog, which has this week written to company CEOs, CFOs, and audit committee chairs warning that businesses have an obligation to enhance their disclosure on environmental issues.

The Financial Reporting Council (FRC) said most company reports were "not meeting investor needs" on environmental and climate change data, as it urged firms to set out both their own environmental impacts and their exposure to risks throughout their business and supply chains.

In its annual end-of-year letter to companies published yesterday, the FRC said outlining detailed environmental data in company reports was particularly important in the wake of economic disruption and uncertainty caused by the Covid-19 pandemic and the UK's impending EU exit.

It said it expected "increased disclosure or relevant sensitivities or ranges of possible outcomes" in the face of expected economic headwinds in 2021, including data on greenhouse gas emissions, the impact of businesses and supply chains on the environment, and potential climate risks.

Companies should "clearly describe environmental policies, rather than simply naming or listing them", the letter states, as well as explain the precise meaning of terminology such as 'net zero' or 'Paris-compliant', and how they plan to measure and report on their green goals.

"Users of company accounts continue to expect high-quality reporting on a range of pressing issues including climate change, the UK's EU exit and workforce engagement," said CEO of the FRC, Sir Jon Thompson. "The economic uncertainty caused by the Covid-19 pandemic has only heightened the need for companies to provide clear disclosures that allow users of accounts to properly understand a company's position, financial performance and outlook."
 
"The FRC's annual letter is designed to help companies and their auditors meet these expectations and deliver high quality reporting for all of their stakeholders," he added.

It follows the Chancellor Rishi Sunak's confirmation on Monday that climate risk disclosure will be mandatory for most companies, investors and organisations by 2025, in line with the Taskforce on Climate-related Financial Disclosure (TCFD) guidelines.

First outlined by the Financial Conduct Authority, the new rules are expected to force companies representing a market capitalisation of around £1.9tr to publicly disclose the risks they face from climate change and the net zero transition.

Meanwhile, Labour is seeking to add an amendment the government's Pension Schemes Bill that would force all UK pension scheme investment portfolios to achieve net zero emissions in line with the Paris Agreement by 2050 or sooner, according to the Financial Times.

The Bill, which is currently in the final stages of its journey through Parliament, would require pension schemes holding more than £1bn of assets to publicly disclose climate risk in their portfolios by 2023 in line with the TCFD guidelines, or face potential penalties.

But Shadow Work and Pensions Secretary Jonathan Reynolds urged the government to back Labour's amendment, which he said would "show the UK as a world leader in the efforts to meet our Paris goals".

"The climate emergency demands urgent action," Reynolds said in a statement. "Labour's amendment to the Pension Schemes Bill, developed by a coalition across the public and private sector, has the potential to mobilise trillions of pounds towards achieving net zero."

A small but growing number of pension schemes have begun to set net zero emissions targets this year. Last month Aviva announced a 2050 net zero goal for its default pension funds, as it too called on the government to make 2050 net zero targets mandatory across the sector in the upcoming Pension Schemes Bill. Pension provider Nest is also targeting net zero for its default pension strategy by 2050.

The Department for Work and Pensions told the FT it was "carefully considering all amendments" to the Bill and would detail its response in Parliament".

The moves to encourage enhanced diclosure of climate-related risks comes as a separate report from BloombergNEF detailed how the surge in corporate net zero targets is at risk of being undermined by the failure of some companies to adequately define their net zero goals or explain how they will be achieved.

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