Risk & Economy » Climate change » FRC warns of inconsistencies around climate in companies’ narrative and financial reporting

FRC warns of inconsistencies around climate in companies’ narrative and financial reporting

The FRC has urged companies to “avoid the pantomime horse syndrome” in their annual reports

The Financial Reporting Council (FRC) has urged companies to correct discrepancies between narrative and financial reporting after it found that climate and ESG commitments outline in both did not always match.

“[Company accounts should be careful to] avoid the pantomime horse syndrome where the two halves are clearly written by two different people who didn’t particularly take account of what the other half was saying,” said Janet Lucke, senior case officer for the corporate reporting review at the FRC.

Financial statements must be consistent with the narrative reporting, she added.

The FRC are looking for a balanced description to be given of how climate policies and targets are incorporated into business plans, as well as their expected impact on the company.

“The key word here is balanced,” stressed Lucke. “We still quite often see pages of disclosure about some wonderful environment initiative that actually only affect a really small part of the business. We’re looking for a more balanced overview of the impact on the business as a whole.”

An area of focus for the FRC in the upcoming year is climate related risks including the new mandatory disclosures for premium listed companies.

“We’re looking for material climate change policies, risks and uncertainties to be discussed in the narrative reporting and in the financial statements, particularly where investors may reasonably expect a significant effect on the expected life or fair value of an asset or liability.”

Lucke added that even in cases where there is no climate change-related impact “it’s probably worth exposing that fact”.

Companies should also be describing policies and the climate-related terminology it uses in strategic reports since there are no universally accepted definitions of the commonly used terms which can lead to confusion.

“We still very often see companies naming policies without describing what they actually say. If you are using terminology like net zero and Paris-aligned in your reporting, then you need to explain what you mean by this,” said Lucke.

This includes listing which emissions are included in emissions targets, how the company is measuring their progress and how it will be reported on, Lucke added.

Mandatory climate-related disclosure requirements are starting to trickle down to other companies. The Financial Conduct Authority (FCA) currently has a consultation on extending the requirements to asset owners.

Similarly, the UK government announced that companies with over 500 employees and £500m in turnover will have to disclose climate-related financial information on a mandatory basis as of April 6, 2022. This will align with the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations, which at present are voluntary.

“This is not just something for the largest listed companies to be worrying about. This is something coming down the line for everybody and people need to be starting to think about it,” she added.

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