Businesses across the globe are increasing disclosure around their climate impacts. In EY’s most recent Climate Risk Barometer, the report found companies are improving at disclosing and strategizing on their climate risks and opportunities, but efforts still leave significant room for improvement.
Based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), companies' scores for coverage of TCFD recommendations are 84%, up from 70% in 2021, for the corporate reports analyzed. However, the quality of these reports is scored much lower, to the tune of an average 44% quality score in 2022.
“Many firms are not disclosing enough detail on their climate risks, and they aren’t translating reporting into meaningful action to tackle the problem,” said Matthew Bell, EY’s global climate change and sustainability services leader. “This is where we need to see much more progress. If disclosure is to make an impact on decarbonization, it can’t be half-baked.”
While the report calls the data more qualitative vs quantitative, there are some significant overall improvements that contribute to the 14% increase in overall scores from a year ago. The report found nearly 61% of companies have disclosed decarbonization strategies, with the energy sector leading the way outside of the financial sector, and 81% of those companies disclose specific net-zero strategies or transition plans.
The report breaks down how to approach decarbonization with corporate reporting into three parts. First, companies must prioritize their approach through what is relevant to them. By avoiding getting caught up in the details, an organization can begin to see what they need to do to prepare for the second point of direction, benchmarking disclosures against their peers. These two steps will help an organization prepare for the incoming international regulation proposals by groups like the ISSB, the third step of the process.
Founded in November of last year, the ISSB has pushed for disclosure standards on an international level. But according to barometer findings, only 29% of companies reported the impact of climate change on their financial statements, leaving considerable work ahead for ISSB.
“We’re witnessing a sea change in the regulatory landscape around sustainability and climate risk, with new regulatory bodies and proposed standards, as well as examples of individual countries introducing their own rules — so it’s not a surprise that companies around the world are improving their disclosure,” said Bell.
“The fact that less than one-third of organizations report on climate impact in their financial statements shows there is a pressing need for more action,” Bell said. “We’re also seeing a growing trend for ‘greenwashing,’ where companies set hugely ambitious climate targets, with little or no clear plan to achieve them. That might help companies in the short term, but without realistic targets, they’ll be [certain to fail].”
When categorizing the improvement of climate reporting across the world, the U.S. showed little improvement in the 10th best spot, with only a 2% quality increase in coverage of all markets since 2021. Right behind the U.S. is Greater China, which had the most improvement throughout the globe in the same category according to findings, going from a rating of 48% in 2021 to 81% in 2022.
U.S. vs Europe
When asked about the differences between the U.S. and Europe in disclosure practices, Bruno Sarda, partner and principal of climate change and sustainability services at EY, talked to CFO about how the disclosure numbers are similar in both markets.
"When it comes to climate ambition, European companies lead, but when it comes to disclosures, there aren’t meaningful differences,” said Sarda. “When you look at the current state of disclosure, which remains on a voluntary basis to date, participation is very high in the S&P 500 and the FTSE. Further, this level of disclosure to date has been driven by demand from capital markets, not regulators, although that is now changing."
Sarda addressed how CFOs can implement climate measures in their community without politicizing their reports and allocations. "Executives should stick with the facts,” Sarda said. “Climate science is established and the facts are that financial markets have declared they want climate change disclosures to inform financial decisions. These are business topics that have been needlessly politicized. Speak about the impacts on your business and not weigh in on the political aspects.”
“Action doesn’t always follow ambition,” Sarda continued. “Disclosure is a way to track progress and give you a sense of how you’re doing but has to be followed by an investment as to how to execute the opportunity."
Whether it is disclosures, regulations from governments or international committees, or initial actions taken by organizations, these types of implementations aren’t going away. According to the International Energy Agency, global energy-related carbon dioxide emissions rose by 6% in 2021 to 36.3 billion tonnes, their highest level ever recorded.