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Filling the Gaps

09 December 2019 by Hannah Armitage

Filling the Gaps

The challenge of climate change has gained a lot of prominence over the past few years, and it is clear that investors and companies are increasingly seen as part of the solution

The issue surrounding climate change is that it requires companies to look to the future, which can be difficult when there is so much uncertainty. In this context, it can be difficult to work out what to report. Whilst there is no requirement to report on ‘climate change’ specifically there are a number of regulations that may encourage or require, depending on the company, disclosure of climate-related issues.

Best Practice Reporting

To help companies report on this issue, the Financial Reporting Lab recently completed a project on climate-related reporting. The project report discusses what investors expect from reporting on climate change and assessed what best practice reporting looks like.

Many investors view the topic of climate change as material to a wide range of business, and investors are increasingly calling for companies to report on challenges, targets and activities to support the action they are taking on this issue. This project received an unprecedented amount of investor engagement. One reason for this may be that investors themselves are also increasingly under pressure to provide their own reporting, whether that’s to answer client mandates, or in response to regulation.

On 2 July 2019 the UK Government announced, in its Green Finance Strategy, the expectation that listed companies and large asset owners should disclose in line with the Task Force on Climate-related Financial Disclosures framework (TCFD) recommendations by 2022. This framework suggests specific questions and reporting under four core elements – governance, strategy, risk management and metrics and targets.

During the project, discussions with participants quickly focused on the TCFD framework, and given this support for the framework and the Government’s expectation, the Lab recommendations follow this framework. As many investors and companies are only beginning to grapple with this issue, there is a long way to go in order for this expectation to be met.

To help fill this gap, the Lab’s report outlines what investors are trying to understand, questions companies should ask themselves, and what companies should then report.

As part of the project, investors said that they would like companies to articulate:

• how boards consider and assess the topic of climate change
• whether, and how, the business model may be affected by climate change, whether it remains sustainable, and how the company may respond to the challenge posed by climate change
• what the opportunities and risks are, including the prioritisation of risks and their likelihood and impact
• what changes the company might need to make to strategy to capitalise on a changing climate and related opportunities
• what scenarios might affect the company’s sustainability and viability
• how the impact is measured and how the company measures the climate-related challenges and the success of its strategy through strategically aligned, reliable, transparent metrics and financially-relevant information.

Outlined below, across the four elements, are questions companies should ask themselves and what should be disclosed:


In terms of governance, investors seek an understanding of how boards consider and assess climate-related issues. A range of questions flow from this, including:

• what arrangements does the board have in place for assessing and considering climate-related issues? What is the board’s view of the climate change challenge, and what assumptions is it making?
• who has responsibility for climate-related issues and how are the board and/or committees involved and how often are climate-related issues considered?
• what insight does the information give the company and how is it being integrated into strategic planning?
• is the organisation planning to report against the TCFD, and if so, what can be shared about the progress made and what are the plans for disclosure?

The TCFD then expects companies to:

• disclose the organisation’s governance around climate-related risks and opportunities
• describe the board’s oversight of climate-related risks and opportunities
• describe management’s role in assessing and managing climate-related risks and opportunities.

Business Model and Strategy

As outlined, the investor participants were trying to understand how the business model may be affected by climate-related issues, whether it remains sustainable, and how the company may respond to the challenge posed by climate change, including what changes the company might need to make to strategy. Questions posed under these headings included:

• what does the company look like in the future and how will it continue to generate value? What strategy does the company have for responding to the challenges?
• how was the decision about the materiality of climate-related issues made?
• what strategy has been put in place to reach that aim, and what operational or capital expenditures are needed to address any necessary business model changes? How are long-term projects structured to ensure flexibility, including options for deemphasising and emphasising if circumstances should dictate?
• how are the risks and opportunities reflected in the financial statements, for example the effect of assumptions used in impairment testing, depreciation rates, decommissioning, restoration and other similar liabilities and financial risk disclosures?

TCFD then expects companies to:

Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material

• describe the climate-related risks and opportunities the organisation has identified over the short, medium and long term
• describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning
• describe the resilience of the organisation’s strategy, taking into consideration difference climate-related scenarios, including a 2 degree or lower scenario.

Risk Management

In order to help investors understand the risks and opportunities presented by climate change including the prioritisation, likelihood and impact, what scenarios might affect the company’s sustainability and viability, and how the company is responding, the types of questions investors were asking included the following:

• what systems and processes are in place for identifying, assessing and managing climate-related risks, and to what extent can current processes be developed to assist?
• how is a consideration of climate-related issues integrated into the risk management process and connected to other related risks?
• how is the assessment of the company’s viability over the longer-term taking into account climate-related issues?
• if the company is undertaking scenario analysis, how did the company decide on which scenarios to use and what assumptions have been made, and how do these relate to the outcomes advocated in the Paris Agreement?
TCFD then expects companies to:

• disclose how the organisation identifies, assesses, and manages climate-related risks
• describe the organisation’s processes for identifying and assessing climate-related risks
• describe the organisation’s processes for managing climate-related risks
• describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management.

Metrics and Targets

In relation to metrics, investors seek an understanding of how climate-related issues, and their impact, are measured, including metrics, data and financially-relevant information. Questions companies may ask themselves in answering those questions include:

• what information is most relevant to monitoring and managing the impacts of climate-related issues, and how were these identified and how do they link to the strategy and business model?
• has a strategy been defined, with related metrics to measure progress, setting the company on a course to net-zero carbon by 2050, and for interim stages in between now and then?
• what is the scope and boundary of the information presented, and is this the same across all information presented?
• what is the company trying to achieve in relation to climate resilience and what targets has it set? Have the targets been achieved, and what comes next?

TCFD then expects companies to:

• disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material
• disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process
• disclose Scope 1, Scope 2 and, if appropriate,
Scope 3 greenhouse gas (GHG) emissions, and
the related risks
• describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets.

The Lab’s report provides more detail on participants’ views and provides a wealth of examples. Earlier this year the Lab carried out a stakeholder survey asking for views on future projects and on our project reports. Company respondents, many of whom were company secretaries, pointed to the examples as a particularly helpful part of the Lab’s reports, so our recent projects have focused more on providing these. As reporting on climate change is relatively new for most companies and investors, reporting practice is only developing. The Lab’s report provides a basis to move this reporting forward. 

Hannah Armitage is project manager at the Financial Reporting Lab

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