Investor expectations around climate change reporting

03 March 2020

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 company view (including the challenges of providing the information); 
  • questions for companies to ask themselves in order to produce useful reporting; and 
  • examples of good disclosure and developing practice.

The four main areas covered in the report are:

  • governance and management;
  • business model and strategy;
  • risk management; and 
  • metrics and targets.

Governance and management

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

  • who has responsibility for climate-related matters;
  • the frequency with which climate-related matters are discussed;
  • insights into the quality of the discussion; and 
  • the way in which relevant information has been incorporated into strategic planning and key decision-making.

Investors expect Boards to be involved in:

  • setting the company’s strategy (taking into consideration the issues and opportunities climate change poses to this strategy in the future); and
  • assessing and considering materiality of climate-related risks and opportunities.

Disclosures expected by the TCFD include:

  • the board’s oversight of climate-related risks and opportunities; and
  • management’s role in assessing and managing climate-related risks and opportunities.

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:

  • pricing and demand assumptions used in impairment testing models that involve carbon products;
  • depreciation rates of assets whose useful economic life may be affected by climate-related issues, and any decommissioning obligations that may follow; and
  • recognition of an onerous contract provision due to loss of revenues due to climate risk.

Disclosures expected by the TCFD include:

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

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:

  • the inclusion of climate risk in current risk management considerations, rather than as a separate process or consideration;
  • the materiality of climate risk reported even where it has not been considered a principal risk;
  • as well as high-level risks, asset-level data eg where sites may be located, and what this means for specific transitional or physical risks faced; and
  • climate-related issues included in viability statements even if the results cannot be quantified with a high degree of certainty.

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:

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

Metrics and targets

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

Investors would like:

  • metrics to be clearly aligned to strategy;
  • the boundaries and scope of the metrics to be transparent, as well as being robust and reliable;
  • to have an understanding of how metrics have been overseen or assured;
  • metrics to be placed in the context of the company’s ambitions and targets eg what level of emissions reduction a company is aiming to achieve;
  • companies to explain how metrics have been calculated consistently or on a comparable basis; and
  • companies to use industry-specific approaches, or standard methodologies where available.

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:

  • the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process;
  • scope 1, scope 2 and, if appropriate, scope 3 greenhouse gas (GHG) emissions, and the related risks; and
  • the targets used by the organisation to manage climate-related risks and opportunities and performance against targets.