Financial Reporting Council Backs Changes to Sustainability Reporting
January 27th 2021 | Posted by Dave Cross
Financial Reporting Council Backs Potential Improvements in Corporate Sustainability Reporting
In 2020, the Financial Reporting Council (FRC) carried out a thematic review of climate change considerations.
This review follows recommendations on the theme that the Financial Reporting Council provided in 2019.
The main message from the review is that climate change needs to be a central factor in decision making and this integration needs to be well-planned and ordered.
The FRC recognises the global focus on non-financial reporting in its review. It also speaks of working with organisations to ensure that they report according to recommendations from the Task Force on Climate-related Financial Disclosures (TCFD).
2019 background to FRC thematic review
In 2019, the FRC joined forces with the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA), and The Pensions Regulator (TPR) to recognise the challenge of climate change. As part of this recognition, the FRC said that climate change should be considered by Boards as part of “emerging risks”. This is in line with the UK Government’s Green Finance Strategy which was published in July 2019 and the TCFD framework which includes four recommended financial disclosures that relate to climate change which are:
- The governance that an organisation implements around climate-related risks.
- The strategy and financial planning that an organisation has in place to address risks that are related to the climate.
- The risk management processes that an organisation has in place concerning climate matters.
- The targets and measurements that an organisation uses when addressing climate-related risks.
Findings of the Financial Reporting Council review
Following on from these recommendations in 2019, this year’s review from the FRC brings forth several key findings.
- There is a limited commitment to climate considerations in business models. Goals are often set without substantive measurement and assurance measures being in place.
- Basic narrative disclosures by organisations are insufficient for customers and stakeholders to make informed decisions. More relevant information is required.
- When it comes to compliance with International Financial Reporting Standards, many organisations do not meet the required standards for reporting climate-related matters in financial statements.
- Not every company has a good standard of training and support in place in relation to climate change-related audit practices.
- Many auditors need to make improvements when considering climate-related risks.
- Investors expect to see information about the financial implications of climate-related matters in addition to the TCFD framework.
Overall, the FRC review identifies several issues with the way organisations currently report on climate-related matters and associated financial implications. This means that reports are often not fit for purpose when they are being used by interested parties. As a result, the Financial Reporting Council advises organisations to up their game in this area. The regulatory body recognises that this is a different time to be asking organisations to do more but given the ongoing emphasis on corporate sustainability, organisations need to address the limitations of their reporting if they want to survive and grow in a competitive environment. Customers and investors expect them to so and are likely to look elsewhere if reporting processes are not sufficiently robust.