Regulators and businesses to face climate disclosure learning curves

Climate disclosure requirements have aimed to foster transparency around companies’ climate impacts and boost accountability for net-zero goals.

“A lot of companies are now reporting their ambition to get to a net zero position. That may take many years. So, we need to be able to find a way for companies to report to show their investors and stakeholders the progress they're making,” Mark Babington, executive director of regulatory standards at the UK Financial Reporting Council, told the CA ANZ Small Firm, Big Impact podcast.

However, climate disclosures must be backed by credible models, otherwise, businesses face risks of greenwashing, overconfident climate risk assessments and poor adaptation strategies.

Many climate risk models generated in the industry aren’t backed up by scientific evidence, climate risk accounting expert Dr Tanya Fiedler warned.

“There are lots of folks out there who are trying to build models that integrate [climate] projections into insights around individual assets, but research has shown that the outputs of those are non-comparable, which suggests that there's a lack of accuracy,” Fiedler told Accounting Times.

Her research found that quantitative climate models were difficult to apply in a business context. Instead, Fiedler and her team suggested that businesses take a narrative-based account of their climate risks.

“There are very rigorous ways of generating narratives which have numbers underpinning them, but which provide information in the narrative form, because they are a more accurate way of describing the uncertainty surrounding the phenomena,” Fiedler explained.

Adapting to mandatory climate disclosure requirements will be a learning process, Babington said, recalling the UK’s experience of introducing TCFD climate reporting.

“In year one there were some problems, but that didn't mean we went and took regulatory action against every problem,” he said.

“We also have an obligation to help the market learn.

“The objective that we all want is to provide this high quality, assured information. How do we get to that point as quickly as possible?”

The requirement to account for scope 3 emissions – emissions that occur in a company’s value chain – is intimidating for businesses, Babington said, but added that accountants were uniquely placed to help businesses understand their material value chain emissions, he said.

“Everyone says, oh, value chain. There are loads of things in my value chain. It's going to be really complicated. But actually, a lot of the reporting frameworks require companies to report on material value chain components,” he said.

“Materiality is a concept that's really well understood by professional accountants and perhaps not as well by others. So therefore there's tremendous scope there to provide advice to entities to make sure that not everything is falling into their reporting, that they really focus on what is material.”

Climate disclosure requirements would allow businesses to understand climate-related risks and opportunities, and empower stakeholders to make informed decisions based on the climate performance of the companies they engage with.

“The real importance of sustainability information is it provides a different set of information for people to make decisions about where they choose to invest, about who they choose to buy things from, about the sort of companies they want to engage with,” Babington said.

“This is no longer just about how much profit you make or you know what's on your balance sheet. It's about the impact that running your business has on the planet.”