Early doors for climate related reporting

The Task Force on Climate Related Financial Disclosures (TFCD) set up in 2015 by the Financial Stability Board and G20, determined that climate related disclosure was critical.

In 2020 the FCA along with the UK government set up a roadmap for mandatory TCFD disclosure from listed companies and in 2021 introduced rules for Asset Managers and other asset owners to make disclosures.

Generally, reports need to detail risks and impacts that climate change poses to the holdings of the asset manager or its owner. Specifically, this requires annual mandatory disclosure at entity level i.e. to be held on the website, setting out how the firm takes climate related matters into account when transacting on behalf of clients. Also at product level, again in a prominent place on the main website, details of the core climate related data.

To be clear the requirements extend to UK listed commercial companies with premium or standard listing as well as issuers of listed shares and global depositary receipts (GDRs), life insurers and FCA regulated pension providers as well as Asset Managers. These disclosure rules were applied from 1 January 2022 for the largest in scope firms and January 2023 for smaller firms with the full details of the requirements and exemptions in the new ESG Sourcebook (see Business Standards – FCA handbook).
This is all in an effort to help investors transition to a low carbon economy and of course support the critical efforts to ensure the climate crisis is addressed by the investment industry.

Key data for inclusion in reporting is scope 1, 2 and 3 greenhouse gas emissions

• Scope 1 emissions are from the company’s normal operational activity
• Scope 2 emissions produced indirectly i.e. company buys energy to heat its buildings
• Scope 3 emissions generated up and down the supply chain

Download infographic: GHG emissions reporting – Key data

This can be mapped to a straightforward benchmark i.e. FTSE All Share to reveal if the portfolio is investing in higher or lower emitting companies but of course that’s just the start .

Additionally, data required is on the implied temperature rise (ITR) which is linked to the target goal of no more than 1.5c increase to global temperatures, agreed internationally. Asset Managers use the data provided by companies (plus a myriad of other data), but avoid overcomplicating this for investors, by simply saying if a portfolio is within budget on ITR or not.

Investment firms must also report on the resilience of climate related policies against climate related scenarios which includes the severity of weather events. This data produces the Climate VaR (value at risk) but of course the stress testing assumptions here are a moving goalpost given the extreme weather we are now regularly experiencing.

Based on a very basic understanding of the reporting requirements, most investors will be bewildered by the data. It is also fair to say the lack of standardised data will mean most investment firms are not interpreting and reporting in the same way. To use an analogy from Jurassic Park, “are they are filling in the gaps with “frog DNA” to create their own dinosaur”?

Given the variations in reporting it is easy to see how “greenwashing” occurs, something which regulators are adamant must stop. Investors need reliable and standardised information on which to make their investment choices and companies need to understand the importance of their climate related strategies in order to encourage further investment.

In summary- it is early doors and reporting is far from perfect but it has to be a step in the right direction. The next steps require a lot of work and effort on the part of in-scope companies, in fact it is likely most companies will need to create an internal infrastructure for the analysis, compilation and production of data going forward. To start, firms need a well-defined strategy, clearly articulated and agreed by the Board and Senior Executives. That requires knowledge and commitment to the goal of reducing their impact on the climate.

ZISHI’s Executive Certificate in ESG & Sustainability in Finance, delivered in collaboration with University of Bath School of Management, identifies the principal international ESG initiatives and global standards, including reporting. Informing and empowering students to understand and act on the key role of finance in delivering a sustainable future. The next programme starts 24 January 2024. Learn more >