November 03, 2021

Article

Every October the FRC release the findings of their corporate reporting review. This year many elements of the report referenced the disclosure and reporting of climate change which is very timely with the Taskforce for Climate-related Financial Disclosures (TCFD), comply or explain, requirement coming in to play for premium listed entities for periods beginning on or after 1 January 2021.

Encouragingly, improvement has been seen in climate reporting when making comparison to the last reporting season. In particular net zero commitment disclosures and scenario analysis are more prevalent, albeit that the detail required was often quite a way off best practice standard.

As a result of this climate related disclosures will continue to be a key area of focus for the 2021/2022 reporting period. The FRC reminded organisations

… material climate change policies, risks and uncertainties to be discussed in narrative reporting and appropriately considered and disclosed in the financial statements, particularly where investors may reasonably expect a significant effect on the expected life or fair value of an asset or liability.sop

To support your achievement of quality climate reporting we have summarised the report climate highlights:

1. Judgements and Estimates

FRS 102 requires the judgements that an entity makes in preparing its financial statements be explained, as well as any areas of estimation uncertainty that give rise to a risk that a value in the financial statements may require material adjustment within the next financial year. It is likely that when considering the impact of climate on a business that an element of forward projection is required. On this basis it would be reasonable to expect that there is some comment around those estimates and judgements within the notes to the financial statements.

2. Valuation

Organisations whose operations are likely to be impacted by climate change and those who work in carbon intensive industries should consider whether there is a resulting impact on the valuation of items in the financial statements such as stock or fixed assets.

These impacts could result in an adjustment to the useful economic life of an asset, impacting on depreciation or to the future economic benefit expected to be generated from that asset resulting in the need for an impairment.

Exhaustive disclosures are not required in either of these areas however it is important that we fully review the possibility of the need for such a change and that we fully explain this, presenting it consistently within both the strategic report and back end of the financial statements.

3. Alternative Performance Measures

There is yet to be a standardised framework of metrics and KPIs for climate change and sustainability impact. Each organisation will have its own methodologies for presenting this information making it important that we clearly explain the metric, covering not only how they are calculated, but what they are showing, so that the data can be fully understood and interpreted.

4. Narrative Reporting

Positively the FRC have reported that Streamlined Energy and Carbon Reporting requirements and Greenhouse Gas disclosures have been complied with to a level that satisfies Companies Act requirements. However this doesn’t necessarily meet the needs of the user. It was felt that the numbers given, and policies referenced within these disclosures and the wider strategic report should have been provided in more depth in order to add value and clarity to the strategy of the business going forwards.

To support achievement of this the FRC have released a Climate Thematic report which is worth referencing.

Taking this a step further linkage could also be made between the section 172 disclosures and climate and sustainability impact. Section 172 disclosures should set out an organisation’s engagement with its’ stakeholders, and could therefore cover environmental matters where stakeholders have worked together in order to positively impact the business and the environment.

5. Provisions

Finally, where it is thought that the future performance of an organisation may be heavily impacted by climate change to the extent that certain operations are to be decommissioned in the future, there may be the need to recognise a provision. Generally, it is not the recognition of the provision which causes the issue but the additional disclosure around this, particularly those in connection with the estimates in arriving at the provision which are often omitted.

Contributing to your success

If you would like to discuss the benefits of, or best practice in, climate reporting please get in touch with your usual Albert Goodman contact or Sophie Parkhouse direct.

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