How to measure up
Five key takeaways from reviewing technology and media companies’ climate disclosures
Corporate reporting on climate change is now a legal requirement, so all listed organisations have been required to meet these minimum requirements and have been forced to consider their appetite for going beyond these regulatory requirements, to provide additional information for shareholders.
On the other hand, audit firms are now also required by the Financial Reporting Council to consider climate risk in the planning of their assignments. Having supported colleagues in the review of a number of draft year end 2022 annual reports for organisations, including technology and media companies, my overall conclusion is many organisations are in fact missing an opportunity to better communicate their sustainability story to their stakeholders.
Through the first quarter of 2023, Crowe’s Risk Consulting team partnered with audit team colleagues to act as a referral point for a number of climate risk assessments being conducted as part of audit planning. A significant number of these reviews related to technology and media companies, which were either considered public interest entities (PIEs) or were AIM-listed and therefore, fell within the reporting requirements of the climate-related financial disclosure regulations 2022.
As part of the review exercise, five key learning points stood out that are widely applicable to all larger, more complex organisations needing to report on climate change, either due to their public listing or their scale.
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1. Make sure there is an overall narrative thread and a message you are trying to give the audience on your stance towards climate. We have seen draft reports lack a consistent narrative for the organisation’s climate strategy. The chairman or chief executive’s report has been very expansive about the commitments the organisation has made to climate change and sustainability in general, only to find within the detail of the annual report a very minimalistic or boilerplate approach to the regulatory taskforce for climate-related financial disclosure (TCFD) formal reporting requirements over climate change. It’s helpful to report when an organisation has gained support from external consultants or secured external accreditation for their climate commitments, as it shows an ongoing management commitment to allocating resources to addressing the issue. We recommend that management put this commitment into context by explaining why they have made this level of commitment and what it means more broadly for the organisation. The strongest reports disclosed are when an organisation has undertaken a materiality assessment of sustainability issues and used this to prioritise their efforts. Their work had been grounded in various international best practice standards and they were able to clearly link their climate disclosures to their principal risks and business strategy. Each sustainability issue had been considered for impact and likelihood and action prioritised as a result of the findings. Our wider research demonstrates that commercial business for organisations taking a positive stance on climate change are generally about their client and employee value propositions, and not because of reporting or regulatory reasons. Often this stakeholder driven approach fails to come through in formal climate reporting, which is a missed opportunity. |
| 2. Avoid making open-ended commitments without providing detail on how it will be achieved.
We would advise organisations against making claims to be ‘committed’ to being sustainable, ‘supporting a de-carbonised future’, or being ‘ESG compliant’ in the opening sections of an annual report, without there being sufficient clarity on how they will achieve these objectives in practice. It is also very important to take the opportunity of describing the tangible steps taken in the last 12 months to progress towards these laudable goals. One organisation we came across had made an ambition commitment to being Net Zero by 2035, but had failed to either provide any information on its current emissions or how it planned to achieve this target. With one eye to the risks of being accused of ‘greenwashing’, it is better in this context to aim to do more and claim less, until the organisation has put in place a robust framework for managing climate and sustainability projects. |
| 3. Make sure that broad climate-related statements made in strategy reviews or CEO’s reports are backed up with the appropriate level of detail within body of the annual report.
We have seen companies claim to be carbon neutral through energy saving programmes combined with carbon offsetting schemes. However, when reading the detail of their reports, virtually no information is given on their actual emissions and how this has been achieved. The intent of the regulatory framework is to provide transparency to stakeholders and a level playing field in terms of reporting criteria. There was great divergence in approaches to reporting against TCFD requirements. We observed several organisations who voluntarily chose to provide TCFD reports, although they did not yet meet the criteria for formal reporting. In other cases, the strategic review was quite expansive on the organisation’s approach to addressing the challenges of climate change, but the TCFD statements were very sparse and uninformative. This gave the impression that separate teams had been involved in the drafting of each section. |
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4. Fully recognising that no organisation is operating in a vacuum and that the extended enterprise and supply chain will create a significant contribution to overall carbon emissions. In a highly inter-connected technology world, most of the organisations we reviewed disclosed that they rely on outsourced information technology platforms, either through cloud-service providers or third-party data centres. It is important to recognise for these firms with a small number of offices, limited need to travel on business and still adopting hybrid working; that these third-party extended-enterprise operations will represent the majority of their carbon dioxide emissions. These are what are termed Scope 3 greenhouse gas (GHG) emissions and are often still relatively poorly described in financial disclosures. Many organisations who have made broad statements about being carbon neutral (through carbon offsets) or making commitments to being Net Zero have done so without being sufficiently clear whether this only applies to the boundaries of their own enterprise. Given that third party emissions may be several times larger than internal GHG emissions, this type of disclosure could provide a highly misleading picture. Supply chain exposures are not limited to climate change alone. Suppliers organisations choose to partner with are important in terms of considering exposure to the Modern Slavery Act, bribery and corruption and living wage issues, amongst other social impacts. Companies should think carefully about what they say in this regard. One report suggested they were proud to work with organisations with similar values, without providing any details of what due diligence they do to evaluate suppliers. There was certainly an implication that they vetted their suppliers, but no details had been provided. Should an unfortunate story hit the media impacting one of their suppliers, such vague disclosures might be regretted. |
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5. Make sure the climate and sustainability disclosures ring true with the principal risk disclosures. It would be a mistake to think of climate change and wider sustainability disclosures are operating in silo. For those reading an organisation’s annual report, these elements of the report will be read in the context of the wider strategic and corporate governance information provided. It is therefore key that these elements form part of a coherent and consistent narrative. We would highlight the need for sustainability disclosures to be consistent with the how the principal risks facing the organisation are articulated. In an organisation heavily dependent on information technology and handling sensitive customer data, it would be natural to see information security and data protection highlighted as principal risks. If an organisation describes in detail its diversity and inclusion programmes and claims attracting and retaining talent is a key strand of its ESG initiatives, then it would be normal to see people risk highlighted within its risk disclosures. In the same way, the length and detail of climate-related disclosures should bear some relation to where climate risk appears within the principal risks. Information on how this is being mitigated should be supportive of the broader TCFD disclosures. In other words, the strategic importance of particular sustainability issues should resonate with their risk ranking and the efforts being made to mitigate exposures. Alternatively, the investments being allocated to secure new business opportunities arising from the energy transition. |
The implications of these findings are that organisations would benefit from clearly articulating their climate change communication objectives and narrative thread, prior to starting to draft the climate-related disclosures within their annual reports. This is an exercise that larger organisations that publish a specific sustainability report will often undertake and a discipline which it would be wise for more organisations to adopt, now they are being captured by these disclosure requirements. This would ensure that the climate story hangs together between the strategy review, CEO report and principal risk section, as well as the specific climate change disclosures.
Formally reporting on climate change is a now a regulatory given. But can this requirement be turned into a competitive advantage? Climate reporting is still at a relatively immature stage where organisations are making sure they comply with the minimum regulatory requirements.
Often technology organisations are delivering solutions to their customers that enable them to reduce their carbon footprints, by reducing the scale of physical operations or the need for business travel. We have observed that relatively few organisations have currently managed to communicate how they are grasping opportunities arising from the anticipated energy transition. Being able to articulate this message clearly within their annual reports and other external communication could be a source of competitive advantage in attracting and retaining both employees and customers.
Through our practical and experienced team, Crowe is helping organisations consider how they want to set their own agenda for sustainability and climate-related reporting. Please get in touch with Alex Hindson or your usual Crowe contact for more information.
