The UK’s accounting watchdog has launched a major review into whether companies and their auditors are adequately reflecting the financial risks of the climate crisis in their accounts.
The Financial Reporting Council, which sets reporting standards for all listed companies in the UK, plans to use the review to make sure companies are being clear with investors about their exposure to climate risks.
The review could lead to tougher disclosure rules for UK listed companies and more scrutiny on the work of accounting firms – including KPMG, EY, Deloitte and PwC – in helping investors to identify climate risks.
Sir Jon Thompson, the FRC’s chief executive, said company reports and accounts were “essential to understanding how the corporate world is responding to the challenge of climate change”.
“Not only do boards of UK companies have a responsibility to report their impact on the environment and the risks of climate change to their business, but investors expect them to operate sustainably,” he said. “Auditors have a responsibility to properly challenge management to assess and report the impact of climate change on their business.”
The FRC will also examine whether companies have adopted the recommendations put forward by the the Taskforce on Climate-related Financial Disclosures (TCFD), which was set up to highlight the financial exposure of companies to the risk of climate chaos.
Mark Carney, the outgoing Bank of England governor, warned companies late last year to use their next two annual financial reports to road-test how they represent climate risks in their accounts.
He said that while many of the largest banks and energy companies had made progress in how they report their climate risks, this progress is “uneven across sectors”.
Investors are calling for better climate disclosure standards as they face increasing pressure to prove they are investing responsibly.
Under a new voluntary City code, which came into effect this year, pension funds and asset managers must publish annual reports showing they have taken environmental, social and governance (ESG) issues into account when investing.
The FRC, which governs the code, said it would help “align the approach of the whole investment community”.
The FRC plans to select a sample of company financial reports from across different industries to assess to what extent they comply with reporting requirements in relation to the climate emergency.
It will investigate whether auditors have assigned enough resources to analysing climate risks and whether the impact of a climate crisis has been appropriately reflected in company reports and accounts.
The first set of accounts to face the FRC’s scrutiny under its new investigation will be taken from this year, which will be published from early 2021.
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