How the transport sector integrates risks into corporate disclosures

Transport is one of the best-performing sectors for adopting TCFD recommendations but with significant differences between markets.

In brief

• The transport sector is one of the best-performers in terms of coverage of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
• Companies in the transport sector achieved the second-highest score for the quality of disclosures.
• The lowest-performing markets tend to have the least regulatory requirements in terms of climate-related disclosures. 

The analysis of the 2019 EY Global Climate Risk Disclosure Barometer revealed that overall the transport sector was one of the best performers in terms of coverage of Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Collectively, companies in the sector also achieved the second-highest score for the quality of disclosures, with companies on average covering 65% of the recommendations. Each of the companies in the transport sector that were reviewed received a score for the coverage and quality metrics on the basis of how they addressed or implemented all of the 11 recommendations by the TCFD.

Most companies in the sector disclosed some level of information covered in the TCFD recommendations, helping the sector to achieve a relatively satisfactory score. Of the companies assessed, 38% covered all of the TCFD recommendations and 63% achieved a higher score for quality than the overall sector average. 

Despite being the second-best performing sector, the transport sector showed significant discrepancies across the different markets in terms of quality. One-third of the assessed companies scored less than 10% in quality, while some obtained over 50%.

Top-performing markets in the sector included France, Germany, the US and South Korea. While France, Germany and the US were already identified as leaders of the transport sector in 2018,  South Korean companies improved their quality of climate disclosures when compared with 2018. This could be explained by the maturing reporting market.

The lowest-performing markets in the sector included Argentina, China mainland, Kazakhstan, Malaysia, the Philippines, Portugal, Russia and the UAE. Companies in those markets were not bound by any national or local legislation to disclose any information regarding climate-related topics. Singapore and Belgium were also among the lowest performers.

We examined how the transport sector performed against the four areas, through which the TCFD recommendations are structured.

Governance

Companies in the transport sector attained the best coverage score of all the sectors for governance recommendations. This could be attributed to the board and management of companies assessed being significantly involved in climate-related issues. The transport sector also ranked the second-highest for the quality of governance disclosures. Companies assessed generally provided detailed information on the:

• Responsibility of the board on climate-change matters and a description of the board’s oversight on climate-related risks and opportunities
• Processes and the frequency by which the board committees are informed about climate-related issues
• Consideration of climate-related issues in their overall business strategy

The management of specific climate-related issues was not always outlined in the disclosures. This could be because most companies in the transport sector do not have a governance structure dedicated to climate-related issues. Instead, companies tended to have global corporate social responsibility (CSR) or sustainability committees, or departments with responsibility for climate-change matters. The disclosures typically consisted of a general mention of the climate-related issues, but no acknowledgment that the sustainability committee was responsible for overseeing its risks and opportunities.

Structures for climate-related management for the top performers of the transport sector were well described and well explained. They particularly showed how climate matters were considered at all the different levels of the company and clearly defined their responsibilities, demonstrating a solid interaction between management and the board.

Strategy

In terms of strategy recommendations, the transport sector achieved the second-highest score of all the sectors. Companies assessed usually described more information than the other sectors about their strategy regarding climate-related risks and opportunities. The transport sector also achieved the second-best score in strategy quality. Across the transport sector, there were varying results for strategy quality, with over one-third of the companies assessed attaining less than a 10% score and almost an equal amount of the companies scoring more than 60%. The description of climate-related risks and opportunities was commonly adopted by the transport sector companies.

Only a handful of companies described the resilience of their strategy based on different climate-related scenarios. While most of the companies assessed the identified climate-related risks and opportunities in their disclosures, the materiality process used to identify the potential impact, and likelihood of each risk and opportunity was not always detailed. In addition, the process for determining material risks and opportunities was not always described or explained.

A number of top performers provided a good description of the climate-related issues and the materiality determination process (e.g., mode and frequency, criteria for materiality, level of stakeholder involvement, and linkage to the value chain). The financial impacts of risks and opportunities were particularly well assessed, and the methodology used was explained in detail by the top performers in their reports to Carbon Disclosure Project (CDP). 

Risk management

The transport sector also achieved the second-highest coverage score of all the sectors for risk management. The majority of the assessed companies provided some description of their organization’s process for identifying and managing climate-related risks. The transport sector was the best performer in terms of the quality of risk management disclosures. The inclusion of a climate-related risk identification and assessment process was commonly adopted. However, the quality and details included varied considerably between the companies.

Companies within the transport sector generally obtained good results because they clearly outlined their risk identification and management, and the application of their materiality processes. Nevertheless, these processes were not always linked with the overall risk management process. Climate-related risks and opportunities tended to have a specific management process. Only half of the companies which had an optimal quality score for the process of assessment or management of their climate-related matters, also obtained an optimal quality score for the integration of this process into their overall risk management.

Top-performing companies mostly described an integrated risk management framework where processes for climate risks were included in the overall risk management process. Also, process ownership and responsibilities to identify and then manage the climate-related matters were well explained across all the different levels of the business (such as at the business unit level, management level and board level). In their climate-related risks assessment and management process, some companies valued the implication of internal stakeholders (including identification, updating and validation of risks and impacts) across all departments of the company.

Targets and metrics

The transport sector obtained the highest coverage score for targets and metrics recommendations of all the sectors, with companies scoring relatively similar to each other.

Just under half of the assessed companies scored above 60% in terms of the quality of their disclosures, meaning the transport sector obtained the best quality score across all the sectors for targets and metrics. In addition to detailed information on their Scope 1, 2 and 3 greenhouse gas (GHG) emissions, companies in the transport sector disclosed more information about their climate-related KPIs and the associated targets, such as carbon emission intensity indicators (e.g., for car producers: gCO₂/km) or consumption indicators (e.g., for transporters: total fuel consumption).

Despite a satisfactory coverage score for the recommendation on Scope 1, 2 and 3 emissions, only 19% of companies provided consistent historical information of their GHG emissions, and the methodology or boundaries used were rarely consistently explained.

Most of the companies from the best-performing markets disclosed targets with time frames and base year for all their key climate-related indicators. For example, best performers disclosed:

• Average carbon intensity indicator for cars (gCO₂/km)
• Carbon dioxide (CO₂) emissions per passenger and per kilometer
• Total fuel consumption with fuel efficiency indicators

The best performers also reported on the evolution of these indicators, which enabled historical trend analysis.