CDSB: guiding the profession through climate disclosure
26 October 2020: Sundip Jadeja, Technical Manager at the Climate Disclosure Standards Board, explains how the organisation is helping to advance the integration of climate-related matters into financial reporting.
A working group under the governance of the Climate Disclosure Standards Board (CDSB) has been set up to develop guidance for preparers on considering and incorporating climate-related matters into financial reporting. ICAEW is represented on the working group along with IFAC and others. “We need to make sure that what we develop is fit for purpose for accountants and the wider market,” says Jadeja. “We’re looking to create guidance for the end of this year.”
As he points out, there is plenty of activity on the climate reporting front. “In the last few years, there’s been a lot of movement around non-financial reporting within the annual report – the front half. In Europe, we’ve seen The Non-Financial Reporting Directive that requires companies to report – increasingly – on matters including the environment. In the UK we’ve had similar developments when it comes to s172 reporting – Directors’ Duties to Report – on a number of matters, including the environment.”
Perhaps most significantly, the TCFD recommendations have grown in both prominence and expectation since they were published in 2017. In 2019, the UK Government outlined in its Green Finance Strategy that the TCFD recommendations would become mandatory for all listed companies by 2022, as well as large asset owners. And let’s not forget that the New Zealand Government has just said that companies must report around TCFD by 2023.
“An area we’ve looked closely at relates to reporting against TCFD recommendations in company reports and, although there is still work to be done in terms of getting better reporting, there is a clear trend in that direction,” says Jadeja.
“However, while there is movement in the front half of company reports, there’s increasing concern that climate isn’t appropriately reflected in the actual financial statements of the annual reports – the back half,” he says. “That concern has come from the TCFD itself.” So, while progress has clearly been made, there are still no numbers for investors to focus on. Now, a public letter from investor groups representing over US$103 trillion in assets under management states clearly that they expect climate to be fully reflected in financial reporting.
Perhaps another development has come from the International Accounting Standards Board itself which has explained how climate should be considered and, where material, integrated as part of financial reporting. “It has said that accounting standards – as they are written right now – do, in fact, allow for climate to be integrated, even if climate is not considered to be quantitatively material,” says Jadeja. “If there is significant investor interest in specific matters, including climate, to be reported – even if the financial impact is zero – qualitatively there may be an expectation of some sort of disclosure in the back half.”
So where does the CDSB fit in? Jadeja responds: “Historically, CDSB has been involved in integrating the environment, and more specifically climate, into reporting. That’s through our framework which explains how environmental matters can be reported. When TCFD was developed, we then got involved in developing guidance for preparers on how to implement TCFD reporting into their practices. Last year we also developed a Good Practice Handbook which illustrated what other companies are doing to help guide companies. Earlier this year we also produced Climate Guidance to assist companies in the disclosure of material climate-related information in annual reports.”
Now, IASB has made its position clear around how climate can be integrated into financial reporting, perhaps CDSB has a heightened role to play around the practicalities of reporting. He says. “From a preparer’s perspective, the question is now: how do I actually go about putting climate reporting into practice, especially now that IASB has actually highlighted a number of standards where climate might be relevant that accountants might need to consider.”
The thinking from CDSB was to develop some guidance. “Firstly, we want to explain why climate matters and why it needs to be reflected in financial reporting. We wanted to explain some legal issues around what climate reporting means for directors as well as acknowledge the challenge that accountants face. After all, it is difficult to predict the trajectory of the impact of climate and fully reflect that in the financial statement with any certainty. But uncertainty is no longer an excuse for avoiding disclosure around climate,” he says.
“Secondly, we wanted to select a number of standards that were highlighted in the IASB paper and then show how climate might be applied in theory but, more importantly, develop some examples of what this might look like.”
For example, this could comprise a scenario for a specific industry and show which accounting standards are relevant – or how the accounting standards should be interpreted with that scenario in mind – and then show what a mock disclosure might look like.
The guidance will be published by the end of this year so that it is ready for preparers in 2021. It will be aimed at all companies – not just those operating in high-risk sectors.