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Climate risk reporting needs ‘clear and pragmatic’ guidance

Author: ICAEW Insights

Published: 05 May 2021

ICAEW has backed government moves to improve the quality of reporting around climate-related risk but warned that changes risk overwhelming organisations with their complexity.

In its response to the government consultation on mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs, ICAEW says a new era of corporate reporting means non-financial information now ranks alongside financial information in terms of its importance in understanding how a company creates and maintains its value more broadly.

But despite recognising the importance of climate-related disclosures in improving transparency and driving corporate behaviour, ICAEW warns the legislation underpinning non-financial reporting has evolved into a confusing set of different rules for different sizes of companies, which often overlap, with multiple layers of complex scoping.

In its submission to the BEIS consultation, ICAEW says it understands the rationale for proposing that new requirements on climate-related financial disclosures be included as part of the non-financial information statement within the strategic report. “It is nevertheless a cumbersome mechanism for bringing these new requirements into UK company law. More worryingly, it compounds an already complex reporting landscape for companies at a challenging time.” 

Sarah Dunn, technical manager in ICAEW’s Financial Reporting Faculty, said there was an urgent need for the government to review the underlying legislative requirements for non-financial information to rationalise the scope and requirements for the Strategic Report and Directors’ Report.

“There is still much work to be done to improve the depth and quality of non-financial information. However, if we continue to add requirements without consideration of the purpose of requiring the information, how it interrelates, and where it should be presented within the annual report as a whole, then we risk undermining the ability for companies to communicate in a clear and meaningful way,” Dunn said.

Dunn called on the government to provide “clear and pragmatic guidance” especially for larger private companies producing climate-related disclosures for the first time. An important aspect of this guidance will be to emphasise how reporting under the TCFD framework is a journey which demonstrates how an entity understands and manages climate-related risks and opportunities over time.”

Meanwhile, ICAEW says it strongly supported the IFRS Foundation’s plans for a Sustainability Standards Board to develop global sustainability reporting standards as a significant step towards greater consistency, comparability and reliability of non-financial reporting. Any proposals to beef up climate-related disclosures must be made in the context of this bigger picture for non-financial reporting, it adds. 

Implementation challenges relating to the UK legislation including the scope, level of detail, and location of information in the annual report are all important issues to be considered not just for the current proposals, but for non-financial reporting more generally, ICAEW warns. 

“Taking the time to stand back and review the broader legislative landscape and global developments is vital to ensure that UK companies are properly equipped to communicate effectively on a broad range of matters, including climate change,” Dunn said. 

Nigel Sleigh-Johnson, Head of the Financial Reporting Faculty adds: “We believe that the UK has a unique opportunity to again lead the way in how it implements non-financial reporting requirements, including those outlined in this consultation while setting out a bold vision for the future for corporate reporting which recognises the importance of non-financial information alongside and integrated with the financial information in the annual report.” 

Read ICAEW’s full response: Consultation on requiring mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs

Understand your narrative reporting requirements and hear ICAEW’s current thinking on developments for non-financial reporting standards at ICAEW’s Non-financial reporting hub

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