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FRC Flags Errors and Omissions in UK Corporate Climate Reporting

TPI launches 1.5°C Scenario Benchmark to track corporate decarbonisation efforts against IEA’s 2050 roadmap.

UK corporate reporting on carbon emissions and energy consumption contains “a number of entity-specific disclosure errors or omissions”, according to findings published by the Financial Reporting Council (FRC). The auditing and corporate governance watchdog reviewed the quality of Streamlined Energy and Carbon Reporting (SECR) disclosures from companies spanning an array of carbon-intensive sectors.

The updated SECR rules came into effect from 1 April, 2019, under the 2018 Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations. The rules set out expansive statutory emissions and energy use disclosure requirements for limited liability partnerships (LLPS), as well as large quoted and unquoted companies.

The reports should help to provide investors with visibility of investee companies’ decarbonisation progress in order to ensure their overall portfolios are on track with net-zero greenhouse gas (GHG) emissions targets and compliant with disclosure and risk management obligations.

But the FRC found that a number of reports did not clearly disclose the methodologies used to measure carbon emissions or energy consumption.

“One report did not include any disclosure of methodology and another only provided a cross-reference to the entity’s website, which was not sufficient to meet the requirement. We expect preparers to provide an adequate summary of methodology within their annual reports, although it may be helpful to direct users to more detailed information provided in a different report,” the FRC said.

Further, three reports disclosed an emission reduction target but did not detail how these were arrived at, potentially prompting an investor to question whether the target is realistic, the watchdog added.

In November 2020, the FRC published its Climate Thematic Review report, which identified the main climate-related factors considered by auditors, companies and investors. The report noted that investors were particularly concerned about the quality of climate-related corporate metrics and targets, noting that they were largely proving to be non-specific and lacking in substance.

Companies should understand that “addressing the urgent impact of climate change requires clear and transparent reporting so that investors and users of accounts can make informed decisions,” said Mark Babington, Executive Director of Regulatory Standards for the FRC.

The FRC has outlined its expectations for future SECR reports.

It has asked corporates to “describe the extent of any due diligence or assurance over emissions and energy use metrics” and further provide “clear explanations which help users understand and compare major commitments, such as ‘net-zero emissions’ targets or ‘Paris-aligned strategies’”. The latter should include the disclosure of activities and emissions included in the scope of these commitments, the FRC said.

Staying on the 1.5°C track 

Separately, the Transition Pathway Initiative (TPI) is launching a new low-carbon benchmark to help investors track whether investee firms’ strategies are aligned with a 1.5°C or lower global warming scenario.

The 1.5°C Scenario will be based on the International Energy Agency’s (IEA) ‘Net Zero by 2050’ roadmap, which outlines a pathway for the global energy sector to reach net-zero by 2050 while maintaining a 50% probability of restricting the global temperature rise to 1.5°C or below.

Previously, the global asset owner-led initiative (with a combined US$23 trillion in AUM) assessed corporates on their climate-related management quality and carbon performance across three benchmarks: Paris Pledges (consistent with country-level emissions reductions targets made by Paris Agreement signatories), 2°C, and Below 2°C.

The new temperature scenario is more in line with the recommendations of the Science Based Targets initiative and reflects the warning issued by the Intergovernmental Panel on Climate Change (IPCC) in August.

TPI’s existing benchmarks will also be updated to reflect current climate-related ambitions. For example, the new National Pledges Benchmark will build on the IEA’s Stated Policies Scenario (STEPS), with national targets announced as of mid-2020, replaced TPI’s current Paris Pledges Scenario.

In October, the TPI will publish its annual assessment of the energy sector. This will be the first report measuring companies’ decarbonisation efforts using the 1.5°C Scenario and other updated TPI benchmarks.

Added pressure

Alongside growing scrutiny from investors, UK companies face tougher climate reporting standards.

Earlier this year, the UK’s Department for Business, Energy and Industrial Strategy’s (BEIS) published a proposal outlining how existing regulations will be adapted to support Task Force on Climate-related Financial Disclosure-aligned (TCFD) reporting.

The consultation proposes expanding the existing scope for mandatory climate-related financial disclosures to all large publicly quoted companies, private companies and LLPs with more than 500 employees and/or a turnover of more than £500 million.

These requirements will be finalised by the end of this year, coming into force from 6 April, 2022.

This follows the Listing Rule introduced by the Financial Conduct Authority (FCA), requiring premium-listed companies to disclose in line with TCFD for accounting periods from 1 January, 2021.

The FCA has published a proposal to extend the Listing Rule to include issuers of standard-listed equity shares. Further, the FRC will consider strengthening the compliance basis for all qualifying corporates beyond “comply or explain”, noting that the current “quantity and quality of climate-related financial disclosures does not yet meet investors’ needs”.

The consultation closes 10 September.

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