Taking the pulse of European climate-related reporting

5 March 2020: new research on climate-related reporting has found an improvement in company disclosures and structures, but also highlighted that some businesses are missing an opportunity by viewing such activities as a “pure compliance exercise”. Chris Warmoll reports.

While the dangers of climate change to the world’s business community have long been apparent, recent events have sharpened the focus and forced the corporate world to engage more with how it affects the natural world. Multiple initiatives have emerged to foster sustainable finance, and regulators and policymakers are increasing pressure on companies to act.

In light of this, Brussels-based European Financial Reporting Advisory Group (EFRAG) has published How to Improve Climate-related Reporting, its first climate-related reporting project. EFRAG was established in 2001 to develop and promote European views in the field of financial reporting, including providing IFRS endorsement advice to the European Commission.
 
Prepared by EFRAG’s Project Task Force on Climate-related Reporting (PTF-CRR), its new report provides a snapshot of how firms have fared since 2017 when the Task Force on Climate-Related Financial Disclosures (TCFD) provided guidance on how to report on climate change.

The report also looked at the climate-related reporting elements of the EU Non-financial Reporting Directive, on which a public consultation was launched last month.

But as none of these frameworks are mandatory, they are more carrot than stick. A fact not lost on Michèle Lacroix, the PTF-CRR chair, who is acutely aware that “even if the goal is clear, it is a long journey” that lies ahead.

As part of its analysis, the taskforce analysed the climate-related reporting of some 150 listed European companies – both large and small – to identify how far they have travelled down this increasingly important path. 

The team discovered that climate-related financial disclosures were typically in an “early implementation stage” and while there was clear room for progress, even among more mature reporting companies, the PTF-CRR noted an “improvement in the quality of companies’ disclosures compared to the 2017 reporting cycle”.

Some companies took reporting on climate risk seriously, demonstrated by the quality of their disclosure. These businesses provided evidence that climate change is both actively discussed by management and integrated into their risk management framework and strategy. 

At the other end of the scale, others only used climate-related reporting for communication purposes without any connection to business strategy. Many experienced major challenges in complying with existing disclosure requirements and guidance, the majority of which were not aligned or coordinated, creating a burden for both preparers and users.

Some businesses, meanwhile, still viewed TCFD reporting as a “pure compliance exercise” and missed the “opportunity to perform a genuine analysis” to report on “both their resilience to climate-change risks and the impact of their strategy on the environment”. 

A perhaps less surprising revelation was that companies were found to be good at reporting the climate-related policies that they have in place, but less successful at reporting how they monitor or perform against such policies. 

The report found a clear disconnect between the time horizon of potential impacts from climate change – often greater than five years – and what companies use for business planning and strategy definition purposes – usually less than five years. 
 
It also unearthed more positive evidence, such as governance practices starting to change for the better. Some companies were setting up ad-hoc committees in their governance structure to deal with climate-change risks and explicitly consider them in their corporate strategy. 
 
And despite the haul of mixed messages, the PTF-CRR remains hopeful that with the growing sense of urgency around climate-related issues, its findings can help inform and educate companies to raise their collective bar for the next climate-reporting cycle and help preparers to enhance the quality of their reporting.

The Commission has today launched a public consultation on the review of the Non-Financial Reporting Directive (NFRD). This Directive requires certain large companies to include a non-financial statement (e.g. on environmental or social issues) as part of their annual public reporting obligations.