Last week, the Financial Reporting Council announced a major and much-needed review of how companies and auditors assess and report on the impact of climate change.
With climate change becoming a defining challenge of our times, this study is a welcome move. If business is to play a role in taking on this challenge, directors need to be given clear and consistent guidance on how to report on their firms’ climate change impacts - a key proposal from our recent Corporate Governance Manifesto.
Investors, including perhaps most notably BlackRock, have over the last year or so repeatedly called for companies to do a better job of making public their climate impacts. In the words of hedge fund manager Sir Christopher Hohn, 'Investing in a company that doesn’t disclose its pollution is like investing in a company that doesn’t disclose its balance sheet.'
Hohn's assessment gets to the heart of the issue: disclosing carbon impacts is not simply about accountability to stakeholders but also a recognition that environmental risks are material to a firms’ operations. As energy companies and natural resources firms well know, climate change will require a fundamental rethink of some industries. If such companies fail to inform the market of their carbon exposure, how can market participants arrive at an informed view of the company’s prospects?
It’s certainly true that creative accounting continues to hamper the reliability of some balance sheets, though we at least have a high degree of consistency around financial disclosures. However, our shared understanding of how to disclose carbon emissions remains inconsistent, despite the excellent work that has already been done by the Task Force on Climate-related Financial Disclosures, the FCA and others in this area.
The FRC’s review presents an excellent opportunity to begin developing best practice and common standards for companies within the UK. This will be far from an easy task, and there are a number of tricky questions to be addressed. For example, how should a firm account for the effect of its upstream supply chain on the environment, or indeed its customers’ emissions?
There is no single correct answer to these questions but it is essential to arrive at a common standard that allows firms to be compared with their peers and to be compared over time.
Arriving at common metrics and standards is urgent and pressing. Such issues are now front of mind for the IoD and in the coming weeks, we will be announcing a landmark multi-stakeholder project looking at among other issues whether delivering a carbon neutral economy by 2050 is achievable within the confines of our existing corporate governance and corporate law framework.
Carum Basra, Corporate Governance Policy Advisor
Carum joined the IoD in August 2019 to work on Corporate Governance policy. Prior to joining the IoD, Carum served as a Senior Associate at a leading strategic communications consultancy where he advised clients across a broad range of public affairs issues.
Carum holds a BA in Politics from the University of London and studied International Corporate Governance at Queens University, Belfast, graduating with Distinction in 2019.