Regulators across the world are focused on addressing stakeholder expectations associated with climate change, strategic risks, operational challenges and reporting requirements. The Corporate Climate Responsibility Monitor 2022 was clear that “regulators and standard-setting initiatives must find ways to distinguish and segregate climate leadership from greenwashing, to support ambitious actors to innovate and accelerate decarbonisation”. The 2023 report went further, pointing to “the potential to unlock more substantial global climate change mitigation” where this distinction can be made successfully.

Regulation is developing rapidly, but is still immature, creating an environment that lacks clarity and certainty.

One of the considerations for directors should be how their company is monitoring the development of regulation to ensure it is well prepared and can react accordingly.

The chief audit executive (CAE) of a major building society told us: "Regulators are driving the agenda for the banking system. Societal and governance matters have always been important. Significant focus is now on analysing scenarios associated with climate and environmental factors to meet regulatory expectations."

At present, the debate about climate risks and disclosures is often focused on questions around the consistency of the reporting landscape and the drive for a single set of reporting standards. Progress is being made on this issue and there is hope that in time this will provide greater clarity on what might be expected within the annual report and the opportunity for consistency and comparability between companies. The debate should also incorporate how climate reporting and disclosures are assured, and the assurance required over the wider set of risks and mitigating activities associated with climate change.

Climate responses within companies are influenced by employees’ beliefs and expectations. Younger generations are more engaged than ever in the debate about the best way to bring about change and there is evidence that they will make employment choices based on ESG factors, including climate. 

Directors are similarly recognising that understanding the impact of climate change is a fundamental element of their responsibilities. They are expected to identify opportunities and risks by evaluating informed and robust scenarios and aligning these with responsible and demonstrable actions.

External auditors must consider the financial implications and risks associated with climate change. This will impact key judgements and assumptions, particularly provisions and impairments. The impact of climate-related risks and opportunities is also considered when assessing going concern, viability and resilience.

At the same time, it is a common misperception that the external auditor checks every figure disclosed on climate in the annual report. The auditors will consider whether any climate-related disclosures in the annual report are consistent with the financial statements and are fair, balanced and understandable in the way they are described. This requires careful attention from both the external auditor and the preparers, but it does not constitute assurance over the information itself. 

As one chief financial officer (CFO) told us: “We work closely with our auditor to ensure that we and they are comfortable that the narrative disclosure and metrics we discuss in the front half are consistent with the assumptions inherent in the financial provisions and other judgements, such that we tell a consistent story about our performance.”

External auditors are investing significantly in developing the capabilities to understand and assess a broad range of environmental risks, including climate, and are increasingly engaged on these topics with the audit committee. In addition, the FRC is challenging audit firms in their audit quality reviews on the extent to which they have considered and addressed climate-related concerns. 

A senior external audit partner stated: “Climate risks and implications have been fully embedded in our audit approach and methodology for some time. We have invested to develop and embed the capabilities we need as these issues are central to the evaluation of critical judgements. Audit committees expect us to be able to lead on this debate and we are ensuring we are equipped to do so.”

Investors are increasingly looking for climate information and disclosures from companies, but told us that they are unsure about the reliance they should place on existing disclosures. The government’s 2021 publication, Greening Finance: A Roadmap to Sustainable Investment, indicated that 49% of the £9.4trillion of funds in UK assets were integrating ESG into their investment processes in 2020 (up from 37% in 2019). 

However, in Schroders' 2022 UK Sustainability Institutional Investor Study, nearly 60% of ESG investors cited their concerns about greenwashing: the publication of misleading or unsubstantiated claims about environmental performance.

In 2023, the Competition and Markets Authority (CMA) launched an investigation in the retail sector, looking at whether claims about eco-friendly products and services were false. 

Investors tend to encourage assurance by external auditors, rather than other providers, perhaps because otherwise they are not sure how to assess its quality. Nevertheless, a concern raised by an investor during our research was that if assurance is simply outsourced, it may indicate that management are not really investing in the issue and owning it. Another investor suggested: "Be sure that in paying for assurance from external providers you understand the value that is required from it. Otherwise, there may be the ‘illusion of assurance’. If you are obtaining external assurance, ensure there is a conversation to assess its relevance in terms of valuation and to the users of the annual report.”

A range of credit ratings agencies have also indicated that they consider the extent of assurance over key climate targets to be important. Similarly, the Dow Jones Sustainability Index has been clear that it will be requiring “verification”  of key ESG metrics and will score companies down that cannot evidence this. The definition of verification is yet to be articulated.

Critical to progress is the need for directors to own this challenge and engage more directly with investors. In recent years investors have had environmental and climate experts engage with companies, and this needs to continue with focus on short, medium, and longer-term trends.

Stakeholders also include customers, suppliers and a broad range of wider communities. Their expectations of organisations in addressing climate change are high. When commitments are made, stakeholders will rightly expect that there is substance and evidence to support them. 

Broader stakeholders may not have the same knowledge as investors, the traditional users of information. Investors are a knowledgeable group who generally can be expected to understand external audit's value and scope parameters and limitations over financial reporting information and disclosures, including terms such as limited and reasonable assurance. They will also typically have some understanding of the role of internal assurance providers, particularly internal audit.

Most employees, customers and suppliers will not have qualifications in finance or audit. It is, therefore, even more critical that appropriate assurance is obtained and disclosed in a way that clearly represents its scope and its limitations to avoid a widening expectation gap. 

Directors are accountable for all commitments and can only be confident in making these if they understand the source of the data, the process used to aggregate, sort, process and translate the data, and the interpretations that are applied.

• Be clear on the range of stakeholders that have an interest in your climate strategy and risks.
• Understand how to engage with stakeholders to deliver on your accountabilities.
• Frame your assurance plans around meeting the expectations and needs of all stakeholders.
• Discuss and disclose the nature and level of assurance you have obtained to both inform and educate.
• Consider using an audit and assurance policy as a key vehicle for engagement.