Lessons learned - Climate-related Financial Disclosure Regulations
Lessons learned - Climate-related Financial Disclosure Regulations
In February 2024 we published an article exploring some of the common pitfalls in climate reporting focusing largely on those entities that were reporting under the TCFD framework mandatorily (eg. per FCA listing rules) or voluntarily.
Since then, a number of entities have reported for the first time under The Climate-Related Financial Disclosure Regulations which came into effect for periods beginning on or after 6 April 2022, with most entities reporting for the first time in their December 2023 annual reports.
While the regulations don't explicitly mention the TCFD framework, their disclosure requirements are closely aligned. As a result, entities with a history of TCFD reporting had a head start compared to first-time reporters.
In this article, we share insights from the inaugural year of the regulations.
A) Compliance
Unlike under the FCA listing rules, the regulations require compliance rather than a comply or explain approach. It’s crucial to remember,
- All required disclosures should be provided in the annual report.
- There is no requirement to include a detailed compliance statement when reporting under the regulations; and
- Non-compliance with the regulations may have implications for the audit opinion.
B) Metrics and Targets
The regulations require disclosure of targets used to manage climate related risks, as well as KPIs used to measure progress against these targets.
Many first-time reporters offered minimal disclosure in this area, signaling the infancy of their climate reporting journey. We anticipate these disclosures will become more robust with time. It's important to articulate specific targets and the strategies to achieve them, steering clear of ambiguous terms like "net zero" or "carbon neutral".
C) Governance
In general, governance disclosures are of a high quality as preparers have been providing similar disclosures under other regulations for many years. However, preparers can sometimes default to generic disclosures and fail to explicitly state how climate risks and opportunities are identified and managed within the governance structure.
D) Risk Management
The regulations require disclosure of how the company identifies, assesses and manages climate-related risks and opportunities and how this process is integrated into the overall risk management process.
Many preparers rely on their existing risk disclosures in the annual report to meet this disclosure requirement, however, these may not explicitly address climate risks. Preparers should ensure there is sufficiently specific detail for users to understand climate-related risks and opportunities which can, in some cases, be cross-referenced from the broader risk disclosures.
E) Strategy
The strategy section should detail the principal climate-related risks and opportunities affecting the entity's operations. We've observed a range of approaches, from detailed lists with specific timeframes to broader references to existing risk disclosures. Cross-referencing should be precise, pointing to exact pages, paragraphs, or figures, and focus on climate-specific risks. As expected, newcomers provided scant quantitative data, like scenario analysis, but this should improve as their reporting matures.
Looking forward
We foresee a continuous enhancement in the quality and depth of climate disclosures as integrating climate considerations into everyday business operations becomes the norm.
In the UK, the government intends to make UK-endorsed ISSB standards available in Q1 2025. Once introduced, the requirements to report under UK Sustainability Reporting Standards will likely replace current reporting requirements.
While the international sustainability standards are based on TCFD framework, they require a more detailed and granular level of disclosures and will go beyond climate-related topics to other sustainability matters.
For a deeper discussion on any of these topics, please reach out to Anthony Appleton.