Over the past few weeks various organisations have called on companies to report, and make public, their climate-related risks.
This week the Financial Reporting Council, the UK’s watchdog currently in charge of corporate governance and company reporting, made itself heard with an emphatic message to boards and finance departments.
“The boards of UK companies have a responsibility to consider their impact on the environment and the likely consequences of any business decisions in the long-term,” it said in a statement.
“They should therefore address and, where relevant, report on the effects of climate change (both direct and indirect).”
Corporate reporting should consider the “resilience” of a company’s business model, the climate-related risks it faces and its viability in the future, both “immediate’ and in the “long term”, the FRC added.
The watchdog’s statement then gets a little more detailed, calling on companies to reflect the impact of climate change, current and in the future, in the “valuation of assets, assumptions used in impairment testing, depreciation rates, decommissioning, restoration and other similar liabilities”.
The FRC’s call comes as the government announces its Green Finance Strategy, a plan to green private-sector investment. The plan was announced last year and has been under development since.
As could have been anticipated, a body that supervises governance, financial reporting, audit and actuaries would need to be at the heart of plans to realign private-sector investment flows with “clean, environmentally sustainable and resilient growth”.
FRC chair Sir Win Bischoff reminded corporate leaders about the importance of action on the environment, adding that it was “one of the defining issues of our time”.
There are already big pressures on companies to reform their corporate reporting to address environmental risks. In recent weeks the Task Force on Climate-related Disclosures, a project of the G20’s Financial Stability Board, reported on use of its own guidelines for disclosing environmental risks.
Though pleased that some companies were getting on board, it was also worried about the pedestrian rate of change, declaring “the Task Force is concerned that not enough companies are disclosing information about their climate-related risks and opportunities”.
But the FRC does have its own hefty body of climate-related work under way. Later this year the FRC’s Financial Reporting Lab will publish guidance on best practice in climate reporting, while a project on the future of corporate disclosures is exploring the need for more sustainability information.
Climate risk will also be part of the Audit Monitoring Unit’s examination of audit quality, and monitoring is ongoing of strategic reports, which should include statements on climate.
The UK’s Corporate Governance Code was recently updated to make it plain boards should be thinking about “wider society” and “long-term sustainable” success of their companies. If it all comes fruition with the appropriate compliance from companies, the work should add up to a significant contribution to combating the climate crisis.
The Green Finance Strategy does not just include the FRC. The Prudential Regulation Authority and the Financial Conduct Authority are deeply committed too.
Their involvement sends a signal that climate-risk reporting and business models are not just nice-to-haves, but regulatory issues. The pressure for the corporate world to get behind saving the planet continues to mount.
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