Businesses around the world are starting to improve their disclosure on climate risks but are not yet taking much needed action to address these risks and respond to the needs of investors and customers, according to the latest EY Global Climate Risk Barometer.
The report, now in its fourth year, looks at the extent to which organizations across the globe are reporting on – and taking action to mitigate – their climate risks and opportunities. It examines the efforts of more than 1,500 businesses in 47 countries to publish information, based on the 11 recommendations set by the Task Force on Climate-related Financial Disclosures (TCFD), which was established to improve and increase reporting of climate-related financial data. The Barometer scores companies on the number of recommended disclosures that they make (coverage) and the extent or detail of each disclosure (quality).
According to the Barometer, more organizations are now providing some level of information (better coverage) on each of the recommendations than in previous years. Where a score of 100% would show information being disclosed on all recommendations, this year’s average score is 84% – a steep rise from 70% in 2021.
However, companies are still struggling to improve the quality of their disclosures. The average quality score sits at 44% – just slightly above the score of 42% in last year’s survey. A score of 100% would demonstrate that a company is disclosing all of the details needed.
Massimo Bettanin, EY România, Partener climate change & sustainability: ”Many businesses seem to fail to recognize the increasing climate risks they are facing and the related potential financial consequences. The physical impacts of climate change, though quite complex to assess, are expected to get worse in a world that is heading towards a +3℃ temperature increase by the end of this century. Furthermore, we are witnessing a fundamental shift in the regulatory landscape on sustainability and climate change with a multitude of legislative changes and new standards and regulations that increase the legal, market, technological and reputational risks too.
As a result, it is not surprising that businesses all over the world, including Romania, are trying to improve their sustainability and climate change disclosures. However, we observed that in many cases, the possible financial implications of sustainability-related risks are not clearly communicated and the commitment to address such risks is not supported by concrete actions and timelines. Having a proper understanding of the potential threats stemming from physical and transitional climate hazards in under-recognized climate scenarios should be the first step for any business to define a fit-for-purpose response aimed at mitigating such risks and unlocking possible growth opportunities. It is in the best interests of shareholders and stakeholders alike to improve the understanding and awareness around this global and systemic issue.”
Despite burgeoning regulatory and political activity around climate change, and clear improvements in disclosure rules over the past 12 months – including the proposed standards from the newly created International Sustainability Standards Board (ISSB) – businesses are struggling to take practical steps towards decarbonization. For example, only 29% of companies surveyed say that they report on the impact of climate change in their financial statements – a sign that they don’t have the data they need or that they have not calculated the impact; and more than half of the references to climate impact in these statements are qualitative rather than quantitative.
There are slightly more positive signs of progress in other areas. Almost half of organizations surveyed globally (49%) responded that they have conducted 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. Three-quarters (75%) responded that they have conducted risk analysis, and 62% have undertaken opportunity analysis, while 61% have disclosed decarbonization strategies.
The survey also shows that companies are now giving more balanced consideration to different types of risks than in previous years. They are paying attention to both “transition risks” – stemming from changes in the economy brought about by climate change, for example slower growth in specific sectors – and “physical risks” that are a direct result of changes in climate, such as the consequences of increased rainfall. Last year, companies were more focused on physical risks (55%) than on transition risks (25%).
One area in which companies have shown a particular improvement is strategic planning around climate risk. The EY Global Climate Risk Barometer scores organizations’ strategies by examining, for example, the extent to which they factor climate risks and opportunities into their plans or how they build resilience through diversification. The coverage score for strategy has risen to 81%, from 65% in last year’s survey – indicating that more companies are at least disclosing some information in this area.
The quantity and quality of disclosure varies widely across the countries surveyed, but as in the previous three reports, countries with rigorous climate disclosure regulation; a proactive investor community; and strong signals from policy makers, tend to see the highest scores. The countries with the best quality of disclosure include South Korea and Ireland, as well as several in Southern, Central and Eastern Europe, with the UK scoring highest of all on both quality and coverage.
The report also highlights several steps companies can take to accelerate decarbonization for their own organizations and the wider economy. These include treating disclosure as a means to an end, not an end in itself; setting meaningful targets; and exploring the opportunities borne out of climate impacts, as well as the risks.