January 23, 2025 Climate related disclosures
From manufacturing and transport to office based or online service industries, it is a rare business that can claim to be totally immune from the effects of weather and climate change. This winter we have seen all too starkly the impact of the increasing severity of winter storms damaging transport links, bringing down power lines and disrupting IT connectivity.
But climate change also impacts food production, the harvesting of natural resources and, potentially, our ability to manage natural disasters. For example, an analysis by the University of Los Angeles found that vegetation in the areas of the recent fires was 25% drier than it would have been in the absence of climate change.
Whilst some of the impacts of the climate on businesses are largely out of their control, that doesn’t mean that they can be ignored. Potential impacts should be identified with mitigations built into the company’s business continuity plans. The identification and mitigation of climate impacts should also be included in stakeholder communications in order to help them to better assess the company’s prospects.
Admittedly, Climate-related Financial Disclosures (CFD) are currently only mandatory for those larger companies which have over 500 employees and are: traded, banking, insurance or AIM companies; or private companies or Limited Liability Partnerships, with turnover exceeding £500 million. This mandatory reporting came into force for accounting periods starting on or after 6 April 2022.
Now the Financial Reporting Council (FRC) has issued a review of the disclosures made in the first cycle of mandatory climate reporting. Although aimed at those larger organisations which have to report, the findings could also be of benefit to those smaller organisations which look to provide informed reporting to their stakeholders.
As can be expected from a new requirement, the standard of reporting was mixed. On the plus side the disclosure of climate related risks and the risk assessment process was fairly consistent across the companies reviewed. On the other side of the coin, disclosures relating to governance and the identification and management of climate related KPIs were somewhat lacking.
Interestingly, the FRC also flagged up the fact that whilst risks were largely identified, the identification of climate related opportunities was not as prevalent. Threats and opportunities are both sides of the risk management coin and both should be considered as a part of the identification process. Organisations were also encouraged to ensure that disclosures are clear, concise and entity-specific; a finding which has previously been identified in other reporting reviews.
