The Climate Disclosure Standards Board (CDSB) has recently issued an exposure draft on the corporate reporting of greenhouse gases (GHGs). The document outlines how companies could present such information and link it to the management commentaries that accompany the financial statements they publish.
The CDSB's draft identifies four templates it proposes be used to determine what information relating to climate change should be included in the management report and how to make such disclosures useful to the decision makers that may read it. These templates and a number of the associated disclosure guides include:
|No.||Reporting Template||Typical Disclosure Guide|
(and Corporate Governance)
|A statement on how management sees climate change affecting the business’s strategy, as well as it's competitive- ness and access to resources.|
Significant actions the company is taking a) to maximise opportunities and b) to minimise, manage and/or adapt to the risks associated with climate change. These include litigation and reputational issues not addressed by template 2 (regulatory) and template 3 (physical) risks.
|2.||Regulatory Risks||Details of climate change regulations, policies and carbon trading activities affecting the company.|
Overview of implementation and associated costs, trends and events likely to impact on the financial condition or operating performance of the company.
|3.||Physical Risks||Description and characterisation of the physical risks associated with climate change to which the company is exposed.|
Actions or plans to mitigate against the physical risks identified.
|4.||Greenhouse Gas Emissions||Details of Scope 1 (direct) and Scope 2 (indirect purchased electricity, steam, heating and cooling) emissions.|
Details of Scope 3 (other indirect) emissions where sources are owned or controlled by the reporting organisation - but see comments below.
The draft is accompanied by an Appendix prepared by Pricewaterhouse Coopers (PwC) that presents a worked example of how a typical company might produce a GHG emissions report.
It may be noted that the four templates proposed exclude any estimate of the life cycle emissions / embodied energy content of the assets employed by the business and how these might ultimately relate to a company’s balance sheet and profitability. It is therefore suggested that a fifth template that would present an annual balance, as well as details of annual inflows and outflows of carbon dioxide emissions and GHG equivalents be developed to address this omission. The magnitude of a company's profitability could then be compared with its competitors or other market sectors in terms of the GHG emissions intensity of its operations (emissions + assets) with values typically expressed in terms of kilotonnes CO2e / $ output. This will not be a simple task in early years, particularly for businesses that are capital intensive and where the organisational boundaries of their Scope 3 emissions are open to interpretation.
Additional points to note include:
- A discussion (Section 6.8 onwards) on the guiding principles of "decision useful" disclosures appears to be rather abstract and difficult to implement. It is suggested that the section be shortened and amended to include a commentary on the need to risk assess Scope 3 emissions because confidence levels in the methodology and the numbers used to determine values are still in their infancy.
- The advocates of sustainability reporting would take exception to the suggestion (Section 6.5) that managing the impact of climate change related issues should help a company increase sales and lower its costs. More appropriately, companies should be seeking to reduce the carbon dioxide and equivalent GHG intensity of their operations.
- The draft is unclear as to whether Scope 3 emissions should be reported, though the Appendix does include details of such emissions.
- Further clarification should be sought as to whether there is a requirement in law for companies to provide details of GHG emissions with annual accounts. Financial accounts commonly only have to consider Scope 1 emissions, whereas cost accounting reports may be used to document Scope 1 and 2 emissions. Disclosure of Scope 3 emissions remains an issue that may have to wait resolution until the GHG Protocol issues new guidelines on product and supply chain accounting in 2010.
In response to actions arising from the Climate Change Act (CCA) of 2008 the UK government has also initiated a program of work to publish guidelines on how GHG emissions are to be measured and reported. This guidance will be non-statutory, but the government has set itself a target of introducing regulations requiring mandatory reporting by April 2012 or otherwise, to explain why this has not happened. Other groups involved in developing corporate reporting standards for climate change include the Confederation of British Industry (CBI) and the Prince of Wales' Accounting for Sustainability project who would wish to see additional environmental and social factors incorporated.
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