EY: Southeast Asia businesses fall short on climate strategy

Despite apparent advances in reporting, businesses fall short on climate strategy and action, according to a study by Ernst & Young.

The 2023 EY Global Climate Risk Barometer finds that there have been incremental developments in the quality of climate reporting, but rate of improvement is not enough to support climate commitments.

Despite agreeing to climate commitments, about 56% of those surveyed in Southeast Asia do not disclose a transition plan to back these.

Eighty-nine percent of respondents from Southeast Asia also do not reference climate-related matters in their financial statements. Of those that do, 64% in the region do not include the quantitative impacts of climate risk in their disclosures, implying that climate change is not being considered in the same way as other material impacts, and is reflective of a broader trend for climate strategy to remain separate from corporate reporting.

Despite improvement in the coverage of (+6% year-on-year (YoY)) and quality of disclosures (+6% YoY) globally, notably in the developing economies, the pace of corporate change remains too slow as we reach a point of no return where improvements in disclosures are not enough, and transformative corporate action is required at scale.

According to the report, which examines more than 1,500 businesses in 51 countries, including 133 companies in Southeast Asia, covering Indonesia, Malaysia, the Philippines and Singapore, to assess performance disclosure against standards set by the Task Force on Climate-Related Financial Disclosure (TCFD), coverage disclosures from Southeast Asian markets remained the same at 84% for 2022 and 2023.

However, the quality in climate disclosures globally remains low at 50% with incremental improvement (+6% YoY) driven only by the need to prepare for increasing requirements for the new International Sustainability Standards Board (ISSB) regulation. In SEA, the quality in climate disclosures is 35% (+9% YoY). 

India (36%), China, and the Philippines (both 30%), and Indonesia (22%) were cited as needing marked improvement. Other markets covered in the study fared better in the quality of disclosure, with Malaysia scoring 43% and Singapore at 41%.

Opportunity to leverage data

"Countries with rigorous disclosure regulation and an engaged investor or policymaker community continue to move forward, drawing on recent TCFD disclosures and readying themselves for the new ISSB requirements," says Praveen Tekchandani, Singapore Climate Change and Sustainability Services Leader and Partner, Assurance at Ernst & Young LLP.

"In Southeast Asia, while each country is adopting the standards at their own pace, progressive regulators such as those in Singapore and Malaysia have started on the journey, resulting in better scores in the quality of disclosure. Importantly, their experience offers valuable lessons for other countries in the region."

He adds that prioritising climate-related disclosures provides companies the opportunity to leverage data to transform their business and operations for a low-carbon future amid the fight against climate change and the emphasis on decarbonisation.

Corporate performance

When looking at the relationship with corporate performance, only one in three companies surveyed disclose quantitative or qualitative aspects of climate-related impact in their financial statements, suggesting that climate risk and impact is not being considered equally within financial performance.

Furthermore, 71% of companies in Southeast Asia were found to have failed to perform scenario analysis in the context of the company’s value chain and wider market dynamics.

Forty percent of companies in Southeast Asia remain less inclined to disclose their strategies on climate-related opportunities than those on risks (52%), signifying that climate change is still not being viewed in the context of business growth.

Transition planning

EY says work must be done on transition planning, as 56% of Southeast Asian companies do not disclose how they plan to pivot their business model and operations to align with the latest climate recommendations.

Of those that do disclose plans (44%), the level of detail remains limited. Sectors exposed to the greatest climate risk unsurprisingly have the most detailed plans, and these include energy (78%), mining (29%), transport (42%), and telecommunications and technology (43%). Agriculture, however, falls behind, with 47% of those surveyed in that sector disclosing any form of transition plan.

Compliance readiness

The report reveals that the companies that have understood the links between climate risk and business growth strategy are well-positioned to address the new climate-related disclosure requirements such as the International Financial Reporting Standards (IFRS) S2, but those who continue to simply take a compliance-driven approach are more likely to struggle to meet the new climate-related reporting requirements.

The path forward to action

The report cites three critical actions that companies should consider taking to support the global climate agenda:

• Mindset shift from burden to action: In the best performing companies, disclosure data is used to drive action.
• Data-driven carbon agenda: Data should not be siloed but should be connected and integrated into risk management and used to drive carbon reduction.
• Boardroom elevation: Climate data should be used at a boardroom level to inform corporate strategy, where leaders take a complete approach to climate impact across the entire organisation.