FRC Lab publishes report on net zero disclosures

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13 Oct, 2022

The Financial Reporting Council (FRC) has published a Lab report on net zero disclosures which is an investor focus area with many companies estimating impact and disclosing climate commitments and transition plans.

The FRC noted in their Environmental, Social and Governance (ESG) statement of intent that reporting in this area is often too high level and fails to provide users with sufficient information to enable them to understand the commitments an entity has set, and its ability to deliver against its targets.

The Lab report outlines the three key elements that investors want to understand about net zero disclosures:

  • Commitments: the level of ambition, scope, nature and timing of the commitment, and what is included and excluded.
  • Impacts: how the commitment impacts strategy and business model, including information on transition plans, assumptions, uncertainties, and risks and opportunities.
  • Performance: how performance is being measured in the short, medium, and long term. How high-quality data and accountability will be ensured, and actions management is taking in response to changes.

The FRC Lab report also highlights investors’ ask for clarity around the use of climate change terminology, including the terms such as ‘net zero’, ‘carbon neutral’, science-based’ or ‘Paris-aligned’.

Companies are at various stages on the journey to net zero – with some companies developing definitions and refining what it is they measure, while others are further along in their transition plans. The Lab report thus helpfully aims its recommendations for companies at either a foundational or advanced stage. Companies at the foundational stage should focus on providing a simple and clear understanding of their commitment, including high-level targets, timelines and impacts. While companies that are more advanced in their net zero reporting should now be providing updates on progress and any refined goals, with more detail on impact and accountability.

The report acknowledges that both investor and company understanding in this area is evolving, and that measuring impact and reporting net zero targets, and supporting information, is an iterative process.

The report is accompanied by a separate example bank which provides some practical examples of current good practice to help companies improve their disclosures.

Further information, the full report and the examples bank are available on the FRC website.

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