As a growing number of UK companies commit to net zero targets, the UK Financial Reporting Council Lab (the lab) has released a report designed to help companies with their net zero disclosures and other net zero commitments. greenhouse gas (GHG) emissions. The report finds that companies face challenges in how they measure, manage, monitor and ensure ESG data. Reports are often too ambitious and high level, and do not provide enough information to users. Importantly, the report highlights that investors expect the net zero reporting regulatory landscape to continue to grow and evolve, and calls on companies to be clear and upfront about how this might change their way of doing business and transforming their strategy and operations.
The report establishes that investors use net zero disclosures to: (i) benchmark companies and their strategies and plans; (ii) understand and compare the GHG footprint of portfolios; (iii) assess the credibility of plans and performance against commitments; and (iv) make decisions, such as investing, divesting or providing financing. It also identifies three elements that investors seek to understand from the information disclosed by companies: commitments, impacts and performance.
The Lab advises companies to define more clearly the nature and extent of emissions included in their commitments, particularly with regard to the types of GHGs included. Carbon dioxide (CO2), for example, is just one of seven GHGs covered by the Kyoto Protocol, and “carbon neutrality” could mean commitments for CO2 alone, or carbon and carbon equivalents , which would include all GHGs, converted into CO2 Impact equivalent.
The report also recommends clearly defining the scope of emissions in accordance with the GHG Protocol Corporate Standard, which distinguishes between direct emissions (Scope 1), emissions linked to the energy used by the company (Scope 2) and emissions upstream and downstream of its activities. supply chain (Scope 3).
While investors appreciate both absolute targets and intensity metrics, the report calls for them to be clearly distinguished and a transparent timeline provided. In addition, companies with a more complex structure are recommended to specify which parts of their business are included and excluded from the commitment. Companies are also advised to provide information on any exclusions or limitations to the commitments, and whether the commitment will be updated for a new approach or a more ambitious objective at a later date.
The Laboratory’s overall approach in the report and its goal of ensuring that the information is as meaningful as possible aligns with the approach it took when reviewing the information from the Information Working Group. Financial Statements (TCFD) and Climate in Financial Statements (Lab TCFD Review) earlier this year. One of the observations the lab focused on in this case was the need for more granular and specific information and, for example, the need to include all key assumptions relevant to the TCFD analysis, as this would ensure that the information provided is as actionable. useful as possible.
Achieving net zero GHG emissions may require significant changes in operations and/or business strategy, and so investors seek to understand what management plans do and how their commitments change operations and/or business strategy of the company. Investors are also looking to understand how committing to reducing GHG emissions can bring both risks and opportunities to a company. Therefore, companies are advised to consider political, macro and microeconomic factors, while ensuring that estimates of future costs related to zero net commitments for research and development, capital expenditures and other green operating expenses are provided.
The report finds that investors would prefer companies to set net zero targets aligned with the Science Based Targets initiative framework, which should be supported by intermediate targets set for the short and medium term, a point also raised in the TCFD Lab Review. Investors also appreciate regular disclosures that articulate current performance against goals and overall commitment, and if performance has been affected by an event, investors appreciate information explaining why that goal has not been met or why progress has been slower than expected. Additional points highlighted by the TCFD Review Lab include the need for businesses’clearly explain what the terms “net zero” or “carbon neutral” mean in the context of the company, ensuring that information about these commitments is not misleading‘. The TCFD Review Lab also suggests that companies should explain the role of offsets in the company’s strategy towards net zero.
The report acknowledges that this is a rapidly changing reporting environment, both in the UK and internationally. Recently, organizations have witnessed the development of the International Sustainability Standards Board’s disclosure standards, including, as noted in a previous blog post, the UK’s Transition Plan Task Force consultation. United on how businesses and financial institutions can develop “gold standard” transition plans, with sector-specific guidance expected in 2023. In addition, the UN report also sets standards for transition plans. transition for businesses, cities and regions, and some governments (such as the UK) are expected to increasingly impose net zero commitments on businesses.
In light of this, the report is useful in helping companies understand investor expectations, as with the development of new net zero reporting standards, regulations and practices, investors anticipate there will be a need to reinvent business operations and strategy, and they want detailed information. information on how businesses will navigate this changing regulatory landscape. This report is published alongside a bank of examples which provides practical guidance by offering examples of current good practice – but the bar will continue to rise.