There is a gap between the way companies identify climate-related risks and opportunities and how they are preparing to tackle them, according to new research.
The vast majority of companies acknowledge that climate change poses financial risks for their business with 83% of companies recognising the physical risks, and 88% identifying policy changes/new regulations as the main risks of transitioning to a low-carbon economy.
But when it comes to turning awareness into action, there is still a disconnect in many sectors and countries. For instance, more than 8 in 10 companies oversee climate change at the board level, but only 1 in 10 provides incentives for the management of climate change issues.
The research, “Ready or not: Are companies prepared for the TCFD recommendations” is from CDP, a charity that runs the only global climate disclosure system for investors, companies and geographical entities, and the CDSB, the Climate Disclosure Standards Board.
They conducted research on 1,681 companies across 14 countries and 11 sectors, looking at the four areas of disclosure identified by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) – governance, strategy, risk management and metrics and targets – and highlighted whether companies in specific sectors and countries are best prepared to disclose information under those themes.
Ms Jane Stevensen, Task Force Engagement Director at CDP, said: “Overall, we see there is a surface level of preparedness from companies globally to have board level oversight of climate risk and opportunity. Key drivers are investor action, company reputation and consumer reaction to climate risk. What we are not seeing is increased governance translating into climate change mitigation. 2018 is the year when companies need to step up climate action as we approach a tipping point. Fundamental to this is driving board level engagement with climate risk throughout the organization.”
Mr Simon Messenger, Managing Director, Climate Disclosure Standards Board said: “This analysis shows that the financial implications of climate change are now firmly on companies’ doorsteps and should be integrated in company-wide processes. It is now the time to set up clear strategies to tackle companies’ exposure to climate risks and seize new economic opportunities.
“It is also clear that the management of environmental issues can no longer be the sole responsibility of sustainability teams: it needs to be a priority area for companies’ boards to ensure it is truly embedded into their strategic priorities. We are more than ever at a crunch point between systemically embedding a market failure or embracing a major opportunity to innovate and grow.”
Climate-related disclosures continue to vary significantly by geography
While companies in France, the UK and Germany are the most prepared to disclose information across three of the four thematic areas highlighted by the TCFD, more than 8 out of 10 companies already disclose the financial impacts from the physical and transition risks of climate change, with companies in South Korea and India having the highest rate.
As recommended by the TCFD, 9 in 10 companies already disclose their Scope 1 and/or 2 emissions*, and 8 out of 10 disclose at least one Scope 3 category. Chinese companies disclose the least in all categories (6 out of 10 for Scope 1 and 2 emissions, 3 out of 10 for Scope 3 emissions).
New supranational and country regulations are improving corporate climate disclosures and their integration into internal governance and risk management processes. However, they are also potentially widening the global gap between leaders (who are bound by more stringent regulations) and laggards.
In addition, new markets are emerging for climate disclosure, with China one of the markets to look out for in 2018. Among a plethora of recent green finance announcements, representatives from the China Securities Regulatory Commission and China Green Finance Committee have been discussing a new mandatory environmental disclosure regulation roadmap to 2020. An awareness of this upcoming mandatory reporting requirement is already seen in their 2017 responses: while Chinese companies currently lag in their disclosure across all four thematic TCFD areas, they already highlight a number of areas (such as the integration of carbon pricing in their risk management processes) which are anticipated to occur in the next few years.
One of the key recommendations from the TCFD is for organisations to describe the resilience of their strategy to different climate-related scenarios, including a 2°C or lower scenario. Compliance with this recommendation will form part of the next CDP reporting cycle, and this report therefore focuses on the other key recommendations.
Nine months on from the launch of the TCFD recommendations, there has been significant regulatory, investor and corporate activity and interest in developing the landscape for disclosure across many geographies. The challenge now is to move that disclosure on and embed it into corporate strategy and culture from board to the front line and set real emission reduction and renewable energy targets.
Scope 1 emissions: All direct emissions i.e. from sources that are owned or controlled by the reporting entity.
Scope 2 emissions: Indirect emissions that are a consequence of the activities of the reporting entity, but occur at sources owned or controlled by another entity20, e.g. purchased electricity, heat and steam.
Scope 3 emissions: Other indirect emissions resulting from activities not covered in Scope 2, and divided into 15 categories: purchased goods and services, capital goods, fuel- and energy-related activities, upstream transportation and distribution, waste generated in operations, business travel, employee commuting, upstream leased assets, downstream transportation and distribution, processing of sold products, use of sold products, end-of-life treatment of sold products, downstream leased assets, franchises, and investments.