Company accounts not meeting investor needs over climate change

Most company accounts are not meeting the needs of investors in factoring in the related risks of climate change, the UK’s audit watchdog has told the boards of British firms.

The Financial Reporting Council (FRC) said in the letter published on Thursday 13 November that it expects them to do a better job of assessing areas such as the impact on asset impairments and fair value.

Some financial statements did not mention climate change even though narrative reporting elsewhere in a company’s annual report suggested it could be having “a significant impact on key financial statement assumptions”, the FRC said.

The move follows a campaign by some investors to push companies including oil majors BP and Shell to better reflect climate risk in their accounts.

Ahead of the next reports from companies the FRC said that where relevant financial statements should show how climate risk impacted key assumptions and disclosures.

As well as how climate impacts the impairment of individual assets and cash generating units, their fair value and likely useful economic life, other key data could include the potential scale and timeline for provisions.

Among other issues, the FRC said it also wanted companies to describe the impact of their businesses on the environment, including their supply chains – a key focus for investors as they look to manage climate risk in their portfolios.

The move by the FRC is part of a wider drive by UK regulators to make sure that climate change issues move up the reporting agenda.

Earlier this month, Britain’s financial watchdog the Financial Conduct Authority (FCA) said that companies listed on the London Stock Exchange will have to improve disclosures on the risks they are facing from climate change from January.

Nikhil Rathi, CEO of the FCA, said the new rules will require premium listed companies to make disclosures consistent with a global set of recommendations made by the Taskforce on Climate-related Financial Disclosures (TCFD).

The change will be introduced on a “comply or explain” basis, meaning companies must say publicly if they are not applying any of the TCFD disclosures.

“We will also consult in the first half of 2021 on extending the scope of these rules and also on introducing TCFD obligations for asset managers, life insurers and pension providers,” Rathi told an online conference hosted by the Corporation of London, the Green Horizon Summit.

Rules for the largest firms in those sectors will come into force in 2022, he said.

Premium listings cover two-thirds of market capitalisation of listed shares, worth about 1.9 trillion pounds ($2.5 trillion).

“Implementing the TCFD’s recommendations in the UK is just the first step. It must be complemented by more detailed climate and sustainability reporting standards that promote consistency and comparability,” Rathi said.