The UK's accounting watchdog has launched a major review into whether companies and their auditors are adequately reflecting the financial risks of the climate crisis in their accounts.
The Financial Reporting Council (FRC) will monitor how companies and their advisers fulfil their responsibilities, and seek to encourage better practice.
The government introduced rules last year that force companies to report their energy use and greenhouse gas emissions. Laws are also in place that instruct businesses to report on how their company is impacting on the community and the environment.
Not only do Boards of UK companies have a responsibility to report their impact on the environment and the risks of climate change to their business, but investors expect them to operate sustainably"
Companies are coming under increasing pressure to make their businesses environmentally friendly amid the rise of activist organisations such as Extinction Rebellion.
"Not only do Boards of UK companies have a responsibility to report their impact on the environment and the risks of climate change to their business, but investors expect them to operate sustainably," the FRC's chief executive Sir Jon Thompson said.
"Auditors have a responsibility to properly challenge management to assess and report the impact of climate change on their business. The FRC has high standards for company disclosure, including regarding climate change. Company reports and accounts are essential to understanding how the corporate world is responding to the challenge of climate change."
The regulator will be reviewing a sample of company reports and accounts across industries to assess the quality of their compliance with reporting requirements in relation to climate change, and will also assess a sample of audits to review how auditors are ensuring the impact of climate risk has been appropriately reflected in company reports and accounts, including the key areas of judgement and related disclosures.
In addition, the FRC will assess the resources available within audit firms to support audit teams in evaluating the impact of climate change on audited entities.
The Financial Reporting Council sets reporting standards for all listed companies in the UK. The review could lead to tougher disclosure rules for UK listed companies and more scrutiny on the work of accounting firms - including KPMG, EY, Deloitte and PwC - in helping investors to identify climate risks.
A version of this article was first published by Investment Europe