FRC advises companies on optimising net-zero disclosures
October 18, 2022
A new collection of tips and guidance aims to help companies provide investors with the most useful information about their net-zero efforts.
Growing numbers of companies are committing themselves to net-zero or carbon-neutrality targets – but how useful is the data they are providing investors about the measures they are taking, and the relevant results? That is the driving question at the heart of new guidance from the Financial Reporting Council (FRC).
Issued on 11 October from the watchdog’s research wing FRC Lab, Net Zero Disclosures provides corporates with best-practice tips and advice for how to optimise their net-zero reporting for the benefit of the investment community.
As the introduction notes, recent FRC research has identified issues with the way that businesses present net-zero information to the outside world in their regular company updates. Indeed, it points out, reporting in this field “is too often aspirational and high level. It frequently fails to provide users with sufficient information. Investors also continue to call for better information in financial statements, including connecting net-zero targets to relevant disclosures”.
In its talks with investors who helped to shape the advice, the FRC pinpointed a range of core purposes for which they would typically seek to use company net-zero disclosures.
For example, investors may wish to understand how closely a business is aligned with their own, ethical values. They may want to compare the net-zero plans or strategies of different businesses, or assess the credibility of a company’s plans and performance against its initial commitments.
In addition, investors may want to use disclosures to understand and compare the greenhouse gas footprints of different investment portfolios. They may also wish to assess the governance and management incentives that are driving a company’s net-zero strategy – and to use disclosures to make decisions about whether to invest, divest or provide financing.
With those points in mind, the report provides businesses with three, key elements that investors most want to understand from corporate net-zero disclosures:
The underlying nature and timing of the commitment, plus the level of its ambition and scope and what it includes and excludes.
How does the commitment impact the company’s broader strategy and business model? This includes details on transition plans, assumptions and uncertainties, together with risks and opportunities.
How is the company measuring its performance against its original commitments in the short, medium, and long term? What steps is it taking to ensure high-quality data and accountability – and what actions are management taking in response to the changes?
Cycle of change
The report stresses that companies must consider those three elements as cyclical – with the actions that management takes in response to the performance-based changes feeding back into the business’s net-zero commitments.
“These elements are part of an iterative reporting process, where company and investor understanding is developing and evolving. As companies develop definitions and estimate impacts, this improves their understanding of what is important for them to measure. In turn, as they improve processes and data, it helps them refine the scope of their commitments and potentially increase the ambition of their aims.”
In discussions with businesses about the processes they have tried with their net-zero reporting – along with the challenges and successes they have encountered – the FRC identified a four-stage template, aligned to the three-stage, iterative cycle:
- define your commitment;
- assess its impact;
- measure your progress; and
- refine your approach.
It also picked up some tips from disclosure preparers, for example: “Start as soon as you can – it takes a while to familiarise yourself with the science [and] terminology and how it applies to your specific business.” And: “Tone from the top matters. It should be clear to employees that this is a key priority of the board, and individual goals should link to it.”
ICAEW Technical Manager, Financial Reporting, Laura Woods welcomed the publication. “For many companies that already include net-zero disclosures in their annual reports, FRC Lab’s guidance will be an important resource to help improve existing disclosures,” she says.
“Companies that don’t already include net-zero disclosures must bear in mind that, under the Greening Finance roadmap, the UK government plans to mandate disclosure of transition strategies, in line with its own net-zero commitment. In that context, providing information that’s most important to investors is critical to help properly inform investment decisions.”
Alongside the main report, FRC Lab has published an example bank of how different companies are approaching net-zero disclosures.