What practical considerations do non-executive directors (NEDs) need to be aware of with the evolution of climate reporting and disclosure over the next few years? This event provided a range of different perspectives on the topic, covering regulation, where to get started, how to progress and what you can learn from other businesses and their approaches.
- Collaboration is crucial. The work that is needed for a business to effectively report on its climate progress can require collaboration across the whole organisation. Involvement and buy in from the executive team to provide a top-level strategic focus, as well as across different functions, is important. There is also benefit in a business reaching out to peers and wider industry forums for support as disclosure requirements develop.
- It will be different for each business. There is a lot to learn from others’ experiences and external advice, but there is no exact blueprint to follow. On top of a good understanding of the regulations, the way that a business handles climate reporting and disclosure needs to be specific to them.
- Reporting and disclosure are important, but it’s about more than that. Integrating climate considerations into reporting is the result, but the bigger goal is embedding climate considerations, risks and opportunities into a business’s strategy and decision-making. Disclosure is an output, but the intention behind these requirements drives further action.
Your questions answered
We received a number of questions that we didn’t have time to answer during the event. You can find the answers from our speakers here.
What is the current reporting landscape?
Mandatory reporting in line with the requirements of the Task Force on Climate-Related Financial Disclosures (TCFD) standard is expected across all parts of the UK economy by 2025.
There are already a number of existing regulations that companies need to report on, which can be found in Phil Fitz-Gerald’s presentation from the event, along with forthcoming requirements.
The International Financial Reporting Standards (IFRS) report IFRS® Standards and climate-related disclosures provides a practical overview of these existing regulations.
The FRC also completed a broader Climate Thematic Review, looking at climate-related considerations by boards, companies, auditors, professional bodies and investors.
How are annual reports changing?
Over the last year there has been a notable shift in the number of companies talking about climate change as the biggest threat of our time. Trends from the last year include:
- Ownership of climate risk being elevated from sustainability/risk teams to the CEO
- Improving governance and oversight, eg establishing climate-focused committees and appointing NEDs with climate experience
- An increase in net zero commitments
- More businesses classing climate change as a principal risk.
As someone who’s been following the evolution of climate disclosure for the past couple of years, I’ve found it interesting how much progress and momentum has been achieved in the past six months.Claire Fraser, Head of Stakeholder Reporting & Partner, Emperor
How are companies responding?
Over the past five years there has been a 72% increase in regulations around stakeholders and sustainability in the corporate reporting landscape. This is only going to grow, and accordingly more companies are beginning to address it.
Research Emperor has done shows that since the FCA confirmed the expectation for premium listed companies to disclose in line with TCFD from 1 January 2021, 36% of companies adopted the recommendations in 2020.
Climate related metrics vary across sectors and different businesses are reporting in different ways. There is an overview of how businesses are approaching this, including specific examples, in Claire Fraser’s presentation from the event. You can also read Emperor’s Navigating the sustainability odyssey: The defining trends and insights from the first set of December year-end corporate reporting suites. Phoenix was one of the companies that adopted the recommendations in 2020 for reasons that Leah Ramoutar outlined in the event, including putting sustainability at the heart of the business, increased interest in ESG from stakeholders and regulators, and keeping on the front foot with the direction of the market. You can read a case study of how Phoenix is implementing the TCFD framework in Leah’s presentation.
This is not like any other form of disclosure I’ve come across. For everything else one has been able to take a checklist off the shelf and take advice on. This is one where we really have to create the authentic map of our own company ourselves.Carol Bell, Director, Chapter Zero
As a NED, what can you do?
- If you haven’t already, make a start. There is a lot to do, so don’t wait until you have all the answers to begin – this is only becoming more urgent.
- Understand where your business is currently at. Different businesses are at different stages in thinking about TCFD and implementation. The FRC Climate Governance Roadmap can help you understand where you are and what is next. Phil Fitz-Gerald talked through this during the event, which you can watch from 10:48 minutes in.
- Ask the right questions. Questioning the executive team can be very useful. You could ask what the climate related risks to the business are, or how cross-function collaborations could be used to support climate reporting. The FRC’s Climate-related corporate reporting: Questions for companies provides a good starting point.
- Encourage the board to consider resourcing. Where will the responsibility for undertaking this work sit in your business? There may not always be a natural place for it, but it is likely to need a focused effort. There may also be a need for technical expertise – can this be done internally or will your business need to secure external expertise? Eg specialist data providers for climate data.
- Learn from others. Take inspiration from businesses further down the road than yours. Emperor’s report Shaping the climate conversation: A deep dive into TCFD and climate reporting in the FTSE 350 can give you an overview of what ‘good’ looks like, and includes specific company case studies. During the event, Leah shared a detailed case study of how Phoenix has approached implementing the TCFD framework. You can watch this from 35:40 minutes in.
NEDs need to recognise that this will take time. It’s not something that will happen overnight.Leah Ramoutar, Head of TCFD Implementation, Phoenix Group
We received a number of questions that we didn’t have time to answer during the event. You can find the answers below:
How can the board help/steer companies to disrupt their carbon-heavy business model and create new categories as an opportunity? Are there any case studies on best practice for this?
Claire Fraser: There are some great implementation case studies and examples in the TCFD Knowledge Hub.
Is there a preference on where companies should disclose TCFD items? Is the annual report considered a best practice?
Claire Fraser: TCFD-related information should be disclosed in the annual report if it is financially material. I would argue that the impact of climate change is financially material for most if not all companies today and therefore disclosures should be discussed at a strategic level in the annual report, with supplementary/supporting information provided elsewhere if relevant depending on the business and/or industry. Emperor’s research found that heavy emitters and financers of carbon intensive activities generally provide a supplementary climate or TCFD report. Layering information across channels is a helpful way to provide access to more detailed information for different stakeholder groups.
I understand the mandatory disclosure proposed by government does not include the TCFD recommendation on scenario analysis – what is your view on this particular disclosure and how important it is for the integration of climate into strategy in a way that is robust?
Claire Fraser: TCFD recommends that companies use scenario analysis to understand the impact of different climate-related scenarios on business operations and performance. Without scenario analysis, the value of TCFD information is limited because it’s not looking at different pathways and transition plans. The latest report from the Transition Pathway Initiative finds that most companies are still not taking a strategic approach to climate change. Their guidance is that companies “need to move from commitments and target-setting to publishing transition plans that can be independently assessed by TPI, enabling equity and debt investors to understand the company’s transition strategy and capital investment plans.”
Do companies which depend on offsets declare the probability that their offsets will be additional, permanent and effective? Given the great scarcity of such opportunities, should those companies disclose the amount they expect to pay for these – in effect an annuity?
Leah Ramoutar: If offsetting, it is really important that a company uses only robust offsets – that are additional, permanent and effective. There are standards that can be used to ensure that any offsets purchased meet this bar – for example the voluntary “Gold Standard carbon offsets”. Companies should always look to minimise emissions before offsetting – this is the right thing to do from a business perspective and from the perspective of the environment. There are definitely reputational risks if offsetting is not pursued as part of a balanced strategy and if poor offsets are used. The price of offsets can vary widely, depending on the type of technology, location and story. Transparency is important – an interesting question as to whether firms should disclose the total cost of offsetting.
In the Phoenix Group Sustainability Report you target 9 SDGs, one of which is Climate Action. How do you manage the trade-off between this SDG and the other 8 SDGs, as presumably the optimum position for Climate Action might not be the same for the other SDGs?
Leah Ramoutar: We are wholly committed to the SDGs though we are at the early stages of our adoption and tracking. The ones we have reported on are the ones we believe matter the most to us as an organisation where we can have the biggest impact, but as part of our work on SDGs, we will be doing a full review and giving sufficient consideration of the level of emphasis we will need to place on each as part of the overall Group effort. On the whole, the climate goal is synergistic with the other SDGs, if the right overall framework is put in place.
What is heatmapping?
Leah Ramoutar: The heatmap is an initial qualitative view of risks which has been used to engage with internal and external stakeholders and allows the Group to focus on its most material risks and opportunities. The heatmap was included on page 71 of our Annual Report and Accounts. To provide a more comprehensive view of risks and opportunities across our business areas, a series of workshops with representatives across the business was held, supported by external research. This informed a qualitative assessment of risks and opportunities facing the business in the short, medium and long term; the result of which was illustrated in a heatmap (rating the significance and relevance of climate impact by low, medium, high, very high across each business area).
Does the TCFD reporting conflict in any particular topic with other frameworks?
Claire Fraser: Global standard setters have been working hard to align the requirements of different frameworks and as far as I’m aware, there is no direct conflict, generally the frameworks complement one another. The following resource from the Corporate Reporting Dialogue addresses this question specifically.
Do participants have ideas/experience on how NEDs can challenge TCFD scenarios that may look too complacent, without micromanaging? Should these scenarios be validated by board committees?
Claire Fraser: In terms of challenging scenarios that look too complacent, a suggestion would be to look at how many scenarios are presented, do they consider the best and worst case outcomes; which third-party data and sources are used as the basis of the analysis – have different sources been considered that may well conflict with one another; in terms of response, is the business looking at robust metrics based on science-based targets, if not why not, what are targets and metrics based on. The FRC’s Climate Governance Roadmap also has useful questions to ask.
Is TCFD as a relatively stand-alone framework here for the long-term, or will its principles and requirements become absorbed into broader frameworks (eg what the IFRS is planning) and if so, how quickly might that happen?
Claire Fraser: The frameworks space in general is evolving rapidly at the moment and there are several initiatives on the go to develop global sustainability reporting standards.
There are two ‘camps’ emerging with the EU and EFRAG driving through changes to the Non-Financial Reporting Directive to become the Corporate Sustainability Reporting Directive (first set of draft standards due by mid-2022, disclosure expected in 2023), vs changes being driven by the IFRS Foundation and the creation of a new Sustainability Standards Board to sit alongside the IASB (timings tbc but we’re expecting things to accelerate pre and post COP26). Plus initiatives by the G20, the G7, the Financial Stability Board and others to develop baseline standards that build on the work of the TCFD. In the pipeline is also the Taskforce on Nature-related Financial Disclosures (TNFD).
The principles of the TCFD – governance, strategy, risk management, metrics and targets – already align with existing corporate reporting requirements, especially for Main Market UK listed companies, so we (Emperor) very much see this as a complementary framework/methodology that should help companies to think about the impact of climate change on their current and future business models and strategies, rather than an additional tick box reporting requirement.
Are there any plans to have a real-time ‘sustainability’ or ‘net-zero’ progress index like the stock market index/share prices of FTSE companies – so shareholders/board can see progress in real-time?
Leah Ramoutar: There are current indices such as the Dow Jones Sustainability Index and the MSCI Global Sustainability Index which track the stock performance of companies in terms of economic, environmental and social criteria. The S&P Paris-Aligned & Climate Transition (PACT) index also tracks the performance of eligible equity securities, selected and weighted to be collectively compatible with a 1.5ºC global warming climate scenario, in addition to several other climate-themed objectives.
Do you recommend using a specialist third party auditors for sustainability reporting & TCFD? Do you think this adds better ‘weight’ to the reporting?
Claire Fraser: Third-party assurance generally always adds greater credibility to disclosures. Worth noting that the proposed changes to the EU Non-Financial Reporting Directive to the Corporate Sustainability Reporting Directive, will require assurance.
Leah Ramoutar: If the assurance opinion will be made public, generally most companies use their existing external auditor and increase scope of services to include sustainability and TCFD reporting.