Are companies reporting the climate change information that investors need?
Listed companies in the UK and overseas have taken on board the activists’ messages about the need for meaningful climate reporting, but there is still further to go, argues Stuart Lemmon.
It is now understood that climate change poses a significant risk to business and the global financial system, alongside the negative impact on ecosystems and society. As such, investors are increasingly asking companies to manage their risk exposure and mitigate their contribution to climate change. But are companies reporting enough, relevant information?
There is progress to be made when it comes to understanding how climate change will affect investment ventures and assets. With the Intergovernmental Panel on Climate Change (IPCC) concluding in 2018 that we must reach net zero carbon emissions globally by 2050 to avoid the worst impacts of climate change and with 2019 already evidencing extreme flooding, heatwaves, wildfires, intense storms, and shrinking ice, the impacts of climate change on our businesses and our investments simply cannot be overlooked.
This article looks at climate-related financial disclosures, climate risk assessment and progress to ‘net zero’ of the UK’s biggest companies based on EcoAct’s ninth annual research into the sustainability reporting performance of the FTSE 100. The report tracks business sustainability, mapping the progress of environmental best practice and reporting across the most engaged and most important decade in climate action.
Taskforce on climate-related financial disclosures (TCFD)
The Taskforce on Climate-related Financial Disclosures (TCFD) has moved the needle on climate risk reporting since its recommendations were released in 2017. The recommendations are formed on the basis that climate change is one of the most pressing global economic issues. The objective is to guide businesses in disclosing the correct information to help investors to understand the financial risks and implications of climate change and to assist their decision-making.
This year, 37% of FTSE 100 companies are aligning with the recommendations of the TCFD, more than doubling from 2018 and similar increases can be observed across the other international indices (CAC 40, IBEX 35, Dow Jones 30) in our study.
This can be attributed to both the rising number of investors now considering climate risk as a factor in portfolio investment and support for the TCFD growing to 825 organisations as of July 2019, including the world’s largest banks, asset managers and pension funds, responsible for $118trn of assets.
This support is only likely to increase with major sustainability reporting frameworks such as CDP, GRI and the UN Principles for Responsible Investment (PRI) aligning to the TCFD recommendations. The PRI announced in 2019 that the TCFD section of its reporting framework will become mandatory in 2020 and the UK government is exploring the appropriateness of mandatory reporting of climate risk.
The uptake is cross-sector as a consequence of this. However, the banking sector now finds itself ahead of the sustainability reporting curve as 100% are reporting in line with the TCFD disclosures and 50% are actively divesting from fossil fuels, including Lloyds, RBS, HSBC, BNP Paribas, Société General and Credit Agricole.
Our findings are in agreement with those of the TCFD’s own status report released in June. There is good progress, but this is best demonstrated among the financial sectors or those already engaging in climate-related initiatives. To provide investors with the information they need, more companies need to urgently answer the call for better climate-related financial disclosures.
Climate risk assessment
One of the key recommendations of the TCFD is that companies assess climate risks based on different future climate scenarios. Climate scenario analysis (CSA) is important to help understand the resilience of a company to the uncertainties of our future climate. It is important that companies consider both the ‘physical’ risks to their business of climate change, like extreme weather events, but also consider the ‘transitional’ risks associated with adapting operations and future legislative changes.
Overall, 39% of companies in the FTSE 100 mention, plan to use or already use CSA up from 18% in 2018, with 100% of electricity, gas and oil companies and 80% of energy, water and multiutilities companies planning to use or are already using CSA. This is an encouraging sign of improvements to risk assessment, particularly within sectors with high exposure to climate risk such as the impacts to infrastructure from weather events and strengthening policy regime around fossil fuels.
However, it isn’t only a matter of climate risk. Companies should also be assessing the commercial opportunities of climate action, including decreasing costs from energy efficiency projects, or increasing margins from the development of innovative low-carbon goods and services. CDP reports US$2.1trn in climate business opportunities, nearly all of which are highly likely or virtually certain and the potential value of sustainable business opportunities being almost seven times the cost of realising them. 75% of companies in the FTSE 100 have identified climate-related opportunities for their business.
Progress to net zero
This year has seen a surge in government, media and public engagement with sustainability issues, with terms like ‘net zero’ becoming mainstream. In June, the UK government committed to a target of net zero greenhouse gas (GHG) emissions by 2050, and with this will come an increased expectation from businesses to respond and we would anticipate (at least if we are to achieve this target) sweeping legislative changes that will have implications for all sectors of the economy.
In the UK, 8% of the FTSE 100 are carbon-neutral in at least part of the business, 15% have committed to carbon neutrality by 2050. Given that this is based on 2018 reporting and, therefore, pre-dates the national legislation, this is an encouraging sign that some businesses are already ahead in preparing themselves. However, it still falls far short of where business needs to be in order to adequately reduce emissions and avoid the worst impacts of climate change to our planet and our financial system. An increasing number will need to be demonstrating their preparedness for net zero to stakeholders in their 2019 reports.
The TCFD has been pivotal in challenging the status quo of sustainability reporting by businesses over the last two years and guiding the industry towards more decision-useful climate-related financial disclosures. Year-on-year, more companies are looking at climate risks and opportunities and providing more of the information that investors need. The rapid up-take of these recommendations demonstrate the influence of investor/ financially-led initiatives. Ultimately, investors play a vital role in driving forward ongoing improvements to climate-related disclosures.
Having said this, we are now in unprecedented times with a changing climate already jeopardising commercial operations, and a target of net zero by 2050 that calls for rapid transformation of our economies. Companies performing highly in terms of their disclosures and their response to climate change are within a minority of business leaders. Improvements to disclosures need to proceed faster still and across the board to ensure that we can safeguard both our planet and our financial interests.
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Stuart Lemmon is managing director at EcoAct, Northern Europe.
This article was first published in the Winter 2019/20 issue of Informed, the IR Society's quarterly journal.
Published 16 January, 2020