Climate change is impacting both society and companies alike. Corporations are responding to its impact, and one of the reasons is that investors are demanding actions. Investors need to know how a company is considering the impact of climate change on its business model, risk strategy, and also the effect on its financial statements. Investors want to understand the future challenges that the company faces, and what the company’s plans are to deal with these challenges.
The Paris Agreement (United Nations) is a legally binding international treaty on climate change which will require a significant reallocation of company resources if the agreed goals are to be met. Therefore, companies could be exposed to a wide range of risks and opportunities as they aim to meet these goals. Companies will need to disclose the financial implications of climate-related challenges that face them.
An increasing number of companies are providing narrative reporting on climate-related issues. Where minimum legal requirements are being met, investors are calling for additional disclosure to inform their decision making. Some companies have set strategic goals such as ‘net zero’ (or carbon neutral), but it is often unclear from their reporting how progress towards these goals will be achieved, monitored or assured. Climate-related narrative reporting requirements and expectations cover both the potential impact on the future of a business and the company’s impact on the environment.
As the demand for climate-related disclosure by investors and other stakeholders increases, many companies are developing their climate governance in line with reporting frameworks, principally ‘The Task Force on Climate-related Financial Disclosures’ (TFCD).
Some of the information that investors may require is set out below:
- the arrangements in place and strategy for assessing and considering climate-related issues
- the metrics used to monitor climate-related goals and targets
- the opportunities and risks concerning climate-related issues which are most relevant and material to the company’s business model and strategy
- the potential effects on the company’s profitability, net assets, products, customers, suppliers etc of different climate scenarios
- are the risks and opportunities reflected in the financial statements, for example the effect of assumptions used in impairment testing, depreciation rates, decommissioning etc
- the assessment of the company’s viability over the longer-term taking into account climate-related issues
- the viability of the company’s business and business model.
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