Businesses around the world are struggling to manage climate risk disclosures and should consider taking urgent action to meet the requirements and expectations of regulators and investors, said EY recently when releasing its Global Climate Risk Barometer report.
The report is based on an examination of the efforts made by 1,100 companies across 42 countries to publish their climate-related risks, based on the recommendations set by the Taskforce on Climate-related Financial Disclosure (TFCD), EY noted.
The research, according to EY, was conducted by EY Global Financial Accounting Advisory Services (FAAS) and looked at disclosures of some of the largest public companies in high-risk sectors (as identified by the TCFD recommendations) in the following jurisdictions: Africa, Canada, Central/Eastern Europe, Central/South America, Greater China, India, Ireland, Japan, Middle East, Oceania, South East Asia, South Korea, Southern Europe, the UK, the US and Western/Northern Europe.
The TCFD was established to improve and increase reporting of climate-related financial information, said the firm, adding that companies are scored for the number of recommended disclosures that they make (“coverage”) and the extent or detail of each disclosure (“quality”).
Half of firms make all recommended disclosures
Only half of companies examined around the world (50%) make all recommended climate risk disclosures and therefore have full coverage; and on average, coverage is 70%, said EY.
However, only 3% of companies reviewed meet the highest levels of quality and the average quality score is 42%.
Companies can be impacted by “transition risks,” stemming from changes in the economy and regulation brought about by climate change. For example, specific sectors may be subject to a carbon price; or “physical risks” as a direct result of changes in climate, such as the consequences of increased storms.
The TCFD recommendations provide a framework that companies can use to report these risks and they include requests for information on governance, impacts on strategy and planning, risk management and metrics and targets.
Other research highlights
In addition, the report reveals that only two-fifths (41%) of organisations reviewed globally have disclosed that they have conducted crucial scenario analysis – which is also a TCFD recommendation – to examine the likely scale and timings of particular risks and prepare for the worst-case outcomes.
Only 15% of businesses reviewed feature climate change in their financial statements – suggesting that they lack robust data or that they have not yet worked through the likely impact on the bottom line, EY observed.
This low level of disclosure was addressed by the recent G7 agreement on steps to make climate reporting mandatory, EY pointed out.
Disclosures vary dramatically by country, although the strongest and weakest performers have not changed over the three years in which the report has been published, said Marie-Laure Delarue, EY Global Vice Chair – Assurance.
“Countries with mature markets where governments, shareholders, investors and regulators are actively engaged in the debate on climate risks tend to score most highly for coverage,” she noted. “Countries where mandatory regimes are due to come into force, for example the UK, score highly on the quality of their disclosures.”
The report also highlights a number of steps that companies can take to help ensure that they meet new disclosure requirements, said EY.
These include ensuring that financial reporting is directly connected to climate risks and embedded into existing risk frameworks, rather than treating climate as a separate issue; and making climate risk disclosures now rather than waiting for global reporting standards to be introduced, the firm noted.