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Investor expectations around climate change reporting

The Financial Reporting Council’s (FRC) financial reporting lab has produced an extensive paper on climate-related corporate reporting. Below is a summary of some of the key elements that investors would like to see incorporated into company reports, linked to the recommendations published by the Task Force on Climate-related Financial Disclosures (TCFD) in 2017.

The FRC paper also contains:

The four main areas covered in the report are:

Governance and management

Investor are seeking to understand how boards consider and assess climate-related issues including:

Investors expect Boards to be involved in:

Disclosures expected by the TCFD include:

Business model and strategy

Investors want to see companies explain how they have assessed materiality with relation to business models and strategies (in the short, medium and longer-term), even if the outcome of that assessment is that it is considered not to be material.

If a company adopts targets (eg to reduce GHG emissions) investors are particularly interested in what that means for the company; and how they are intending to reach those targets. In addition investors want to understand how companies are going to react to the challenges posed by long term climate-related issues (eg legislation).

As well as risks, investors would like to see information on potential opportunities arising from climate change. This may include operating and capital expenditure in particular areas, a discussion of resilience of the organisational strategy, or a greater focus on green revenues.

Investors are increasingly requesting data on an asset-by-asset basis to show where and how the business is operating and what physical and regulatory change may be most relevant. A data point that is used by a number of investors is whether or not a projected carbon price is being used for internal planning purposes, including project planning and assessment.

As well as strategically important information being included in the annual report, if material to the business, investors expect companies to consider and report on the impact on the financial statements, particularly around estimates, for example:

Disclosures expected by the TCFD include:

Risk management

Investors would like to see more reference to climate-related issues in the reporting of principal risks and uncertainties and its impacts.

For companies, climate related challenges could include disrupted supply chains, regulatory changes, land use amendments, water scarcity, or weather-specific changes at main production sites. Investors expect to see:

Given the uncertainty inherent to climate change, scenario analysis is considered important and is one of the key elements of the TCFD.

Investors seek information on which scenarios have been assessed, what assumptions have been made and information on how these assumptions have been arrived at.

Investors are interested in how a company will be affected under different scenarios, and what strategy they will then put in place to address the related challenges.

The scenarios should tie into wider risk management considerations, strategic planning and viability assessments.

Disclosures expected by the TCFD include:

Metrics and targets

Investors are seeking a better understanding of how climate-related issues, and their impact, are measured.

Investors would like:

Companies are encouraged to disclose data on their Scope 3 emissions which are all indirect greenhouse gas (GHG) emissions (other than direct GHG emissions and electricity indirect GHG emissions) that occur in the value chain of the reporting company, including both upstream and downstream emissions.

Some investors would like a clear link between climate-related targets and remuneration in order to drive change.

Disclosures expected by the TCFD include: