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AGM season to focus on quantifying climate impacts within company accounts

The Investment Association has identified "accounting for climate change" as a critical focus area for AGM season in 2023. In its annual Shareholder Preferences report, the IA said: "When companies do not take climate-related matters into account, their financial statements may include overstated assets, understated liabilities and overstated profits."

In 2022, the investment manager trade body found just 52% of companies incorporated the financial impact of climate-related risks into their financial accounts, with audit committees within this group rarely making a statement to confirm this.

The body acknowledges the industry still awaits a globally consistent framework from the International Sustainability Standards Board to push accounting policymakers to facilitate and enforce such disclosures. But in the meantime, the report affirms that a declaration from directors whether climate and transition risks have been assessed in signing off the accounts is firmly within investor sights for 2023.

The IA also asserts the need for organisations to ensure this analysis is consistently referred to within other investor communications. The report lists press releases and investor updates as areas for focus - potentially serving as a nod to the incoming general anti-greenwashing rule which comprises part of the FCA's wider Sustainability Disclosure Requirement reforms.

Earlier this year, Carbon Tracker noted that 98% of the multinational corporations responsible for 80% of greenhouse gas emissions do not provide sufficient evidence in their financial statements of climate-related economic impacts. The IA's Institutional Voting Information Service will monitor whether directors are making such statements as part of year-end reporting.

Responding to climate change is the other environmental factor listed on the IA's shareholder priorities for 2023. Accordingly, IVIS will issue amber warnings to voters to highlight companies not making disclosures against all four pillars of TCFD to support those voting to support climate-related risk and impact reporting.

Diversity, audit quality and stakeholder engagement are the three remaining priorities the body has listed as the critical drivers of long-term value for UK-listed companies.

The report shares progress relating to diversity across previous reporting periods, citing today's challenging economic environment further reinforcing the need for high-quality and diverse boards.

According to the IA, in 2022, 98.8% of companies in the FTSE 100 made disclosures on metrics and targets, up over 5% from 2021. Yet despite positive traction in the issuance of diversity disclosures, the underlying progress within the businesses themselves has stalled.

In 2022, 22% of companies in the FTSE 100 were given a 'red flag' by IVIS for a lack of gender diversity across the executive committee and their direct reports, a backwards step from the 17% receiving the same warnings in 2021.

This voting season IVIS will flag to shareholders all FTSE 350 companies with less than 35% female representation on the board and 30% of the executive committee and their direct reports, with the hope of drive progress towards the FTSE Women Leaders targets of 40% female representation on boards by 2025.

Similar approaches relating to ethnic diversity were introduced in 2022. Less than three-quarters of the FTSE 100 disclosed the number of board members from an ethnic minority background. Seven organisations were given a red flag for not meeting the Parker Review target of having one director from a minority ethnic group.

Andrew Ninian, director for stewardship, risk and tax at the Investment Association, said: "The AGM season brings to the forefront the issues which investment managers have been engaging on with FTSE-listed companies during the year, with companies' response to climate change and the diversity of their board and top leadership teams remaining a key focus due to their long-term nature and potential impact on company value."

Original Source: Investment Week


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