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FRC announces review into corporate response to climate change

Out-Law News | 24 Feb 2020 | 4:16 pm | 1 min. read

The UK’s Financial Reporting Council (FRC) has announced a major review into how companies and their auditors assess and report on the impact of climate change, examining whether they are ensuring that reporting requirements were being met.

The FRC said it would consider how the quality of information around climate change could be improved to support informed decision-making by investors and other stakeholders.

Corporate governance expert Tom Proverbs-Garbett of Pinsent Masons, the law firm behind Out-Law, said the review highlighted the FRC’s continued focus on environmental issues.

“Following its emphasis on climate change in the 2020 Stewardship Code, the FRC is doubling down on the importance of environmental matters for companies in their reporting - and the contribution of auditors to its inclusion,” Proverbs-Garbett said.

“In the review announced, the FRC will closely examine reporting on environmental, social and governance matters to understand how companies are facing and managing the challenge of climate change,” Proverbs-Garbett said.

During the review, the FRC will review a sample of company reports and accounts across industries to assess the quality of their compliance with reporting requirements in relation to climate change. It plans to assess a sample of audits to review how auditors are ensuring the impact of climate risk has been appropriately reflected in company reports and accounts, as well as assessing the resources available within audit firms to support audit teams in evaluating the impact of climate change on audited entities.

The authority said it would also consider how investors are addressing the climate challenge in the stewardship of their investments and in their response to systemic and market risks when it monitors the first reports under the new Stewardship Code, which will be issued from the beginning of 2021.

As part of the review, the FRC will evaluate the quality of disclosures under the new UK Corporate Governance Code regarding risk, emerging risk and long-term factors affecting their viability; and look at whether the Financial Reporting Lab’s recommendation for companies to report in line with the Task Force on Climate-related Financial Disclosures framework has been adopted, highlighting developing good practice.

Proverbs-Garbett said the Financial Reporting Lab’s report would be helpful to companies.

“That report’s appendices, setting out questions that companies - and most importantly, boards - can ask themselves about the relevance and impact of climate change to their business and sector, together with a large number of examples of emerging practice, will be hugely useful for managing and narrating this complex issue,” Proverbs-Garbett said.

The FRC announced in December that climate change, along with other issues such as Brexit, would form part of its 2020/21 reporting programme. The announcement followed the publication of the revised UK Stewardship Code, which took effect from 1 January 2020 and expects signatories to consider environmental, social and governance issues such as climate change as part of their investment, monitoring, engagement and voting activities.