This year’s EY Global Climate Risk Barometer suggests a deep disconnect between organisations’ climate and corporate strategy.
Despite agreeing to climate commitments, nearly half (47%) of those surveyed don’t disclose a transition plan to back these. Supporting this, 74% of respondent companies 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 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), 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.
The report, now in its fifth year, is an established benchmark that scores the progress being made in both coverage and quality of climate-related disclosures. It examines more than 1,500 businesses in 51 countries to assess performance disclosure against standards set by the Task Force on Climate-Related Financial Disclosures (TCFD). The Barometer measures companies on the number of recommended disclosures that they make (coverage) and the extent and detail of each disclosure (quality).
According to the Barometer, coverage disclosures continue to move in the right direction, increasing from 84% in 2022 to 90% in 2023. Yet, quality in climate disclosures 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. The Barometer revealed a continued lack of granularity in reporting and the effectiveness of regulation surrounding them. Top markets for climate-related disclosure quality included the UK (66%), Germany (62%), France (59%), Spain (59%), the US (52%). However, India (36%), China, and the Philippines (both 30%), Indonesia (22%) were cited as needing marked improvement.
Peter Miller (pictured), Assurance Partner at EY in Guernsey says: “As COP28 begins, EY’s Global Climate Risk Barometer shows there is still work to be done to improve the transparency and data integrity of climate risk disclosures. This continues to be a focus for many Channel Islands businesses and one where there is an opportunity for the finance industry to be instrumental in helping to drive those improvements.”
This year, the report has gone deeper and explored three new areas that will dictate the reporting landscape over the next few years: the level to which climate-related risk and opportunity is reflected in companies’ financial statements, an indicator of a company’s understanding of climate change risks and opportunities, plus its willingness to disclose that understanding; transition planning, to assess if and how companies are moving from commitment to corporate action; and readiness for the additional insights in relation to readiness or adoption of the draft ISSB S2 standards.
Corporate performance
When looking at the relationship with corporate performance, only one in three companies surveyed disclose quantitative or qualitative links between climate-related impact in their financial statements, suggesting that climate risk and impact is not being considered equally within financial performance. Furthermore, 42% of companies surveyed fail to perform scenario analysis in the context of the company’s value chain and wider market dynamics. And, signifying that climate change is still not being viewed in the context of business growth, most companies remain less inclined to disclose their strategies on climate-related opportunities (68%) than those on risks (77%).
Transition planning
Work needs to be done on transition planning; nearly half (47%) of companies surveyed 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 (53%), the level of detail remains limited. Sectors exposed to the greatest climate risk, unsurprisingly have the most detailed plans including energy (60%), mining (60%), transport (58%), and telecommunications and technology (57%). Agriculture, however, falls behind, with just 43% 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 is used to drive behaviour and action, viewing climate risk compliance as an actionable opportunity. In these companies, detailed and rigorous data disclosure is matched by strategy and 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.
Francis Malaspina, Assurance Partner at EY in Jersey, concludes: “It is clear from this report that there is a disconnect between the commitment’s businesses are making versus the actions they are taking. Climate risk disclosures should be viewed as an opportunity to inform wider commercial strategy and gain competitive advantage, not just as a tick box exercise. With the opportunities in the market if businesses across the Channel Islands can adopt and deliver upon these changes, both Guernsey and Jersey will be positioned as leading jurisdictions for sustainable finance.”
The full report can be found here.
