The government response to the then Department for Business, Energy & Industrial Strategy's (BEIS) 2021 consultation on restoring trust in audit and corporate governance made clear that directors should move towards having the same level of confidence in climate risks, opportunities and disclosures as they have for financial information.

Directors should consider operational and compliance controls alongside financial control structures. In doing so, there will be an increased focus on the broad range of short, medium and longer-term risks to business success.

In January 2024, the Financial Reporting Council (FRC) revised the Corporate Governance Code, introducing a new provision that the board should monitor the company’s risk management and internal control framework, and carry out a review of its effectiveness at least once a year. This underlines the importance of internal control.

Financial targets and the rotation of leaders in organisations may result in short-termism. Climate change is, by definition, a challenge with implications over a longer period. It will be important to ensure that assurance considers the full range of outcomes and scenarios, including those with a future orientation, to call out potential risks and unintended consequences. This will be aligned to the need to consider going concern and viability and to report on resilience going forward.

In meeting these expectations, directors need to ensure there is focused time and discussion to evaluate the risks and implications of climate change. Read more about the governance and accountability implications.

Section 172 of the Companies Act 2006 requires companies to consider the needs of a broader range of stakeholders, including but not limited to shareholders. The nature of these stakeholders is explored further in our section on Meeting stakeholder expectations.

Directors need to be confident that they are considering risks and providing information that is relevant and helpful to all stakeholders. To achieve this, companies must pay careful attention to key decisions that stakeholders are considering. 

These might include:

• Do I trust and want to buy this company’s products or services?
• Do I feel aligned with this company’s values sufficiently to want to work for them?
• Am I prepared to work in partnership with this company?
• Do I trust the commitments made by the company sufficiently to use it as a supplier?
• Will I become a charitable partner or advocate of this company?
• Should I be campaigning to see change in this company?
• Is this company going to contribute responsibly to our local community and should we give planning permission?
• Do I want to invest or disinvest?

Transparency and integrity around the organisation’s progress against commitments and broader performance information, whether in the annual report, on the company’s website, or in any other form of disclosures, is critical to building trust. Sufficient detail is needed, including key judgements and assumptions. This detail may be quantitative or qualitative, and may sometimes be implied rather than explicit. Without real authenticity in these commitments, trust could be eroded, with associated reputational damage. Assurance is vital to creating trust.

Leadership teams face difficult strategic choices daily. The information used to underpin these choices is vast and, in today’s business environment, goes well beyond financial metrics. The board must receive a summarised version of this information, highlighting the critical data points in a way that is digestible and enables them to exercise their responsibilities.

Climate-related data is now critical to this management information. It focuses executive and board time on the future and on balancing different priorities. There are significant opportunities for companies that embrace the challenges of climate change. However, those opportunities can only be realised if directors have confidence in the information that is being presented.

Over time, climate data and analysis will be expected to meet the same control standards as financial data points and metrics. The Committee of Sponsoring Organisations of the Treadway Commission’s (COSO) revised 2013 framework on internal control expanded its scope to all forms of reporting, including non-financial reporting, in recognition of the value of internal controls beyond financial reporting. In 2023, COSO supplemented this guidance with a publication on sustainability reporting, Achieving effective internal control over sustainability reporting (ICSR). This is an interpretation of the framework to illustrate how its flexible structure can be used for sustainability and environmental, social and governance (ESG) reporting.

The 2013 framework describes the control objectives that companies might be expected to focus on as:

• accuracy and reliability;
• compliance with laws and regulations; and
• effectiveness and efficiency of the underlying process and operations.

The need for information to meet the expectations of being fair, balanced and understandable – a test that is applied to information contained within the annual report – might be added to this. Assurance is important through the lines of defence and, where appropriate, supported by third-party review and opinion.  

Where companies can deliver climate-related information and commitments with confidence that these control objectives have been met, directors are able to make decisions knowing that they have considered the range of potential consequences and implications. This leads to an optimal evaluation of the available strategic options in implementing climate policies.

Climate change and sustainable business offer real opportunities for companies that are authentically embracing and embedding them within their strategies. There are many rapidly evolving and growing green technology companies where climate and sustainability have been embedded from inception. These companies provide examples of good practice and are at the forefront of driving changes, while others are similarly pivoting to promote a climate-friendly position. However, there are many challenges, such as the lack of consistency in definitions of what it really means to be climate net zero, and which emissions must be considered and reported.

Demonstrating leadership and innovation in tackling the climate crisis can assist in creating a unique sales proposition.

 Trust and reputation are hard to build, but can be lost very quickly if a mistake is made. The issues faced by Volkswagen in 2015 when the US Environmental Protection Agency (EPA) issued a notice of violation of the Clean Air Act and the subsequent damage to its image offer clear evidence of this.

To fulfil their obligations, directors require assurance to ensure that commitments and claims made about new products and solutions are robust and supportable.

In the financial services sector, assurance over climate risks and data is becoming a regulated requirement. For example, the EU Sustainable Finance Disclosure Regulation (SFDR) has introduced requirements for companies to have assurance internally where a financial product promotes ESG characteristics. UK regulators are continuing to develop their response and requirements.

There is increasing pressure from external stakeholders to ensure remuneration policies and practices reflect a broader range of strategic outcomes than purely financial measures. This will include all aspects of ESG, but will often contain a climate-first focus on environmental matters. 

According to Deloitte’s September 2021 report Road to net zero: incentivising leadership, companies are increasingly incorporating the delivery of climate goals under annual and long-term reward frameworks as part of a wider trend towards the use of ESG metrics in executive incentive plans.

The report adds: “While there are mixed views around the inclusion of ESG metrics in executive incentive plans, it can be a powerful tool in driving leadership behaviours when structured in the right way and linked to transparent and quantifiable performance targets. Net zero goals set in line with the Science Based Targets initiative (SBTi) provide one route for boards in demonstrating that targets are aligned with the Paris Agreement and latest climate science, enabling a consistent framework across the corporate sector.”

In ICAEW's research, remuneration was the area where respondents had the strongest and most consistent view that third-party assurance, particularly delivered by external audit providers, is valuable. If non-financial metrics and data points are relied on as an input to remuneration, including for the wider employee base, they must be supportable, and directors are likely to ask for assurance.

There was a clear request from our respondents for external audit providers to consider how an external audit opinion or alternative assurance opinion might be provided alongside the financial audit. In doing so, they believe trust will be built between directors and wider stakeholders including, crucially, employees.

• Articulate the role of climate risk and change in the success of the organisation.
• Ensure the board considers risks beyond the short-term – climate change, by definition, has implications for the long term.
• Allocate sufficient time at board level to evaluate the risks and other implications of climate change.
• Understand the link between climate risk and strategic decision-making that drives the need for assurance.
• Allow time for board-level discussions and audit committee discussions of where assurance will reduce the risk of unforeseen consequences.
• Consider the need for assurance through a commercial lens, focused on products and solutions.
• Ensure remuneration practices are considered as a priority for climate assurance.