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CDSB publishes review of environmental reporting by FTSE 350 companies

  • CDSB (Climate Disclosure Standards Board) (green) Image
  • FRC Image

04 Feb 2016

The Climate Disclosure Standards Board (CDSB) has published a review of the annual reports of FTSE 350 companies, looking at how these companies incorporate environmental issues into their strategic reports. The publication identifies reporting trends and showcases examples of best practice from published reports. It also sets out the CDSB's views on how regulators can enhance the enabling environment for disclosure. At the launch of the report, Stephen Haddrill, CEO of the Financial Reporting Council (FRC), gave his perspective on the CDSB's findings.

Key findings

In their report Comply or explain: A review of FTSE 350 companies’ environmental reporting in annual reports, the CDSB identify four key characteristics of best practice in corporate environmental reporting. The best reports exhibit the following qualities.

  1. They demonstrate a strong relationship between environmental matters and overall corporate strategy, performance and prospects. Applying the concept of connectivity in this manner helps to show a holistic picture of the factors that affect the organisation’s ability to create value over time, including the interrelatedness and dependencies between them. One common disconnect identified by the CDSB in their survey is that a much higher proportion of companies identify one or more environmental matters as a principal risk (41%) than identify at least one environmental measure as a key performance indicator (KPI) (27%).
  2. They clearly set out the purpose of KPIs and consider the characteristics necessary for these measures to be useful to users. The report identifies five common characteristics that could be applied to KPIs to enhance the consistency and comparability of disclosures, recommending that they should be:
    1. connected with financial information;
    2. consistent over successive periods and with internal indicators;
    3. focused on material matters;
    4. presented with qualitative information to provide context; and
    5. consistent with accepted industry benchmarks.
  3. They recognise that environmental reporting is more than emissions reporting. Leading companies are also considering wider natural capital impacts and dependencies, such as risks and opportunities associated with waste, biodiversity, air pollutants, water security and soft commodities.
  4. They consider the environmental impact of the business throughout its value chain, not just within its legal boundaries. One example of this is reporting 'Scope 3' greenhouse gas emissions (those which arise from sources outside the entity's control but are a consequence of their activities, other than purchases of electricity, heat, steam or cooling - for example, emissions from business travel). This is not required by law but doing so can help readers to understand the actions a company has taken to minimise its environmental impacts. The CDSB found that only 26% of reports currently include this information.

 

Enhancing regulation

The report also sets out four ideas for regulators as to how the enabling environment for disclosure could be enhanced. These are as follows.

  1. Building on emerging practice. Regulators should agree shared definitions of terms (such as business model) to encourage reporting on the same content to develop consistently across different jurisdictions.
  2. Balancing flexibility, consistency and comparability. Currently there is considerable variation in reporting practice within and between sectors that is not wholly explained by the unique nature of businesses - further guidance that describes the expectations of reporting companies might help to reduce this.
  3. Establishing and strengthening mandatory reporting requirements. Where information is measurable, objective, auditable, capable of standardisation across companies and widely used for decision-making, the CDSB believes that the case for mandatory reporting of material activities is strong.
  4. Understanding the international landscape and opportunities for alignment. The structure provided by the existing strategic report requirements means that the UK is well positioned to lead the development of non-financial reporting and the implementation of the EU Non-Financial Reporting Directive.

 

Mr Haddrill's speech

In his speech, Mr Haddrill congratulated the CDSB for its contribution and the quality of its report. He also commended its timeliness, noting that:

"Most major companies now recognise that the environment presents risks to and opportunities for their business that they and their investors need to understand.  So the willingness to report is growing rapidly and the question is how best to do it."

He welcomed the report's recognition that materiality should be applied in environmental reporting, as in other areas, ensuring that disclosures made are relevant to shareholders. However, he also acknowledged that the public, including shareholders, want to know that environmental matters have been properly considered and so, where directors have concluded that environment matters are not material, they should include disclosures in the annual report explaining why.

Finally, he sounded a note of caution regarding the report's calls to action for regulators, expressing the view that while this is an area in which regulators should work together, it is too early for standardisation of reporting requirements. He noted that:

"Standardistaion helps comparability but it also encourages boiler plate reporting and that undermines the exercise of judgement.  Narrative reporting is in transition and at the FRC we are keen within legal requirements to let the best ideas emerge."

 

Find out more

The press release and full report are available from the CDSB website. The full text of Mr Haddrill's speech is available from the FRC website.

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