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Company Disclosures Related to Climate Change

by internationalbanker

By Richard Turley

Climate change is real! It is a global challenge impacting everyone, including companies and businesses around the world. Governments and societies are stepping up to challenge companies to address climate-related issues through reducing emissions, investing in responsible enterprises or complying with new and more stringent regulations.

Regulators, investors, shareholders and customers require far more information than previously provided about a company’s activities to allow them to hold companies to account on these measures. They need this information to increase the transparency of and allow comparability between companies, not only in the same industry but across a portfolio, and this requires the enhancement of voluntary and mandatory non-financial disclosures within an organisation’s annual statements and management reports.

The Climate Disclosures Standards Board’s (CDSB’s) Climate Change Reporting Framework is a voluntary reporting framework designed to elicit climate-change-related information of value to investors in mainstream financial reports. This body is setting the benchmarks for company disclosure around environmental and social impacts.

Recently the CDSB has worked closely with the EU (European Union) to facilitate the implementation of the Non-Financial Reporting (NFR) Directive, which requires covered companies to “disclose in their management report information on policies, risks and outcomes regarding environmental matters, social and employee aspects, respect for human rights, anticorruption and bribery issues and the diversity of their board of directors”.

The implementation of climate-related disclosures will increasingly become mandated as governments around the world commit to climate-change emission-reduction targets and need private enterprises to deliver on these promises.

Some countries have already implemented legal requirements for climate-change-related disclosure in mainstream financial reports. Denmark transposed the NFR into national law in 2015 prior to it being mandated by the EU, while Taiwan announced in December 2014 that listed companies in specific industries, such as food processing, chemical and financial services, and those with paid-in capital above NT$10 billion were required to issue a standalone Corporate Social Responsibility (CSR) report.

In the United States, the Financial Stability Board (FSB) has set up a task force to look at climate-related risks within the finance sector. The task force, led by Michael R Bloomberg (assuming he doesn’t run for president), will develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to lenders, insurers and investors and other stakeholders”.

The financial sector is particularly vulnerable to climate-related risks. Insurers need to understand and recalibrate long-term modelling to take into account the increased incidence and volatility of major catastrophic events; asset managers will need to adjust their portfolios to “future proof” against the rapid changes in economic models that will come from a focus away from fossil fuels; and banks will increasingly be called upon to facilitate the flow of funds into climate-friendly investments.

The Global Reporting Initiative (GRI), an international independent standards organization that helps businesses, governments and other organizations understand and communicate their impacts on issues such as climate change, human rights and corruption, says sustainability information is “for investors to enable greater trust in their investments, customers in their products and services, and citizens in their governments”.

The clamour for greater non-financial disclosure grows louder every day. Those organizations that are unwilling or unable to provide adequate information about their environmental practices will find it impacts their corporate value significantly.

Climate-related disclosure is a relatively new discipline, but there are many benefits to establishing consistency of practice across companies and industries. Sharing of best practice, clarity and comparability of reporting metrics, building trust and confidence in the information provided, and bringing long-term strategic focus to a set of management reports are all benefits that should be seen if policies and disclosures are standardised and implemented on a global basis.

To provide confidence in the validity of climate-related disclosures, external assurance of sustainability reports will become increasingly demanded and more rigorous. The International Auditing and Assurance Standards Board (IAASB) has issued the International Standard on Assurance Engagements (ISAE) 3000, which sets out standards of assurance for non-financial disclosures, including sustainability reports. As sustainability reporting becomes mainstream, companies will rely on auditors to sign off on the validity of sustainability reports, and auditors will come under enhanced scrutiny based on the standards of their work.

What will we see change in 2016?

An increased focus on trust. Company reputations take years to build but can be irrevocably damaged in minutes through poor management practice, corporate governance or environmental carelessness. The ability of corporate governance departments to provide accurate and reliable information on their organisations’ measurable goals and objectives in relation to environmental stewardship will be critical in establishing trust with investors and consumers.

Those companies that fail to do this will see negative impacts on their corporate value and will be less able to weather any reputational issues arising out of the inevitable corporate failures that happen with any large organisation from time to time.

Enhanced non-financial disclosure is here to stay and will become more onerous for companies as investors and regulators demand more information. But the long-term benefits for companies and the economy will be seen through better governance, stronger culture and a healthier planet!

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