As the world veers toward a new year, it is important that finance leaders know what to expect in the field of sustainability reporting, given that this particular area has gained the spotlight especially during the latter part of 2023.
Ernst & Young's Climate Risk Disclosure Barometer, which seeks to identify the trends, opportunities, and key issues facing businesses in relation to climate change, dives deep into the key elements impacting climate-related reports in the coming years.
ISSB preparedness
The research looked at companies’ readiness for meeting the requirements for IFRS S2 Climate-related Disclosures. Among the key findings are:
- In relation to governance, companies are adopting the increased ISSB disclosure requirement and disclosing which skills and competencies are required at board level to oversee climate-related strategies.
- Looking at strategy, companies are moving toward additional disclosure around scenarios that include detailed analysis and its inputs. In addition, companies have started to include value chain emission reduction targets within their overall reduction targets.
- From a metrics and targets perspective, companies are moving toward disclosing their Scope 3 emissions for the most material categories.
Leading companies are typically looking at how climate could impact their business strategy, rather than using reporting frameworks solely for disclosure. Climate issues are becoming core to top-line business strategy, and companies that have understood the links between climate risk and their business growth strategy are well positioned to address the new requirements of IFRS S2.
Transition planning
While greater engagement with sustainability disclosures is still needed, companies are now faced with a stark challenge: to design and implement an effective transition plan that takes into account real-world scenarios and commits real resource to the effort.
Yet the study shows that only 53% of the surveyed companies are providing disclosure against some kind of transition plan. This figure should be significantly higher since a well-structured transition strategy helps companies to stay in line with, or ahead of relevant, policy goals for the organization.
Climate risk reflection in financial statements
Companies face heightened demand for greater scope and detail in their climate-related disclosures.
This means that the most pressing question for them in the coming years will inevitably center on how their risks and strategic responses are reflected in their financial statements.
The study shows that 26% of companies are including the quantitative impacts of climate-related risks in their financial statements – which reflects the general trend for climate strategy and risk management to remain largely separate from corporate reporting. This is set to become a tension point since reflecting climate risk in reporting should not be a mere form-filling task, but a comprehensive, forward-looking effort to understand the anticipated financial impact. As such, it should be assessed in the context of the company’s value chain and wider market dynamics.Â
