Businesses around the world are struggling to manage the reporting of climate risks and should consider taking urgent action in order to meet the requirements and expectations of regulators and investors, according to the latest EY Global Climate Risk Barometer report.
- Third EY Global Climate Risk Barometer shows progress on climate risk disclosure but highlights urgent need for more action
- Half of all companies provide some disclosure, but only 3% do so fully
- 2022 set to see significant rise in climate risk disclosures around the world
The report examines the efforts made by more than 1,100 organizations across 42 countries to publish their climate-related risks and opportunities, based on the recommendations set by the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD was established to improve and increase reporting of climate-related financial information. Companies are scored for the number of recommended disclosures that they make (“coverage”) and the extent or detail of each disclosure (“quality”).
According to the report, only half of companies examined around the world (50%) make all recommended disclosures and therefore have full coverage; and on average, coverage is 70%. 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.
In addition, the report reveals that only two-fifths (41%) of organizations 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. It also shows that 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. This low level of disclosure was addressed by the G7 agreement on steps to make climate reporting mandatory.
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. 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. Countries where mandatory regimes are due to come into force, for example the UK, score highly on the quality of their disclosures.
The report highlights a number of steps that companies can take to help ensure that they meet new disclosure requirements. 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.
Commenting on the report, Stavros Violaris, Associate Partner and Sustainability Leader of EY Cyprus, said: “As awareness about climate change is increasing, so is pressure from public opinion, investors and regulators for more comprehensive disclosure from organisations throughout the world. Our survey shows that the level of reporting is improving, but still falls short of what is required. Organisations need to think about how their business models and strategies are impacted and incorporate detailed information on risks as well as opportunities related to climate change in their financial reporting.”