What makes today’s climate leaders tomorrow’s business leaders?

This lack of transparency extends beyond disclosure. While 92% of companies analyzed assess the qualitative or quantitative impact of physical risks, or both, just 44% say they have adaptation measures in place. Without adaptation measures, companies risk far-reaching disruption to their business models — which may be a major concern to investors and other stakeholders.

Sixty-eight percent of companies claim to have undertaken quantitative risk assessments for both physical and transition risks, yet only 17% disclose the financial impact of these risks. This is possibly due to the short time horizons of financial statements and the complexity involved with making the calculations.

Decarbonization levers and the challenge of Scope 3 emissions

The research found that nearly four out of five companies (78%) have disclosed the adoption of decarbonization levers across all three scopes, with almost all (96%) having implemented decarbonization levers for Scopes 1 and 2. Expectedly, Scope 3 emissions continue to pose a significant challenge for companies, with the majority (60% to 90%) reporting only upstream emissions and only 10% to 40% reporting downstream emissions.³

Nearly all nonfinancial companies (98%) have adopted decarbonization levers across at least one scope, and 91% have set emissions reduction targets. Targets are important because they help companies to determine the extent to which emissions need to be reduced, the impact of specific decarbonization levers and which additional measures must be taken to drive emissions reduction.

While most companies report their Scope 3 emissions, at least to some degree, only around half (53%) have an overall Scope 3 target. A delay in setting and achieving Scope 3 emissions reduction targets can hinder companies’ overall progress on climate goals.

Governance

EY analysis found that many companies are accelerating decarbonization efforts, not waiting for formal governance frameworks or clearly defined emission targets. Only 8% of companies disclose capital allocation, 21% target-setting and 41% progress monitoring.

Executive incentive plans are a vital part of the governance process to push for successful climate strategies. The research shows that climate leaders indeed recognize this link, with 82% of the companies analyzed having an incentive plan that features environmental metrics, such as reduction in absolute emissions and their intensity as well as performance against net-zero targets.

Overall, however, the findings suggest governance needs to be improved if companies are to accelerate action on climate change. Nevertheless, it may be the case that boards are more involved with climate strategy than companies are currently disclosing. It is therefore critical that companies improve their disclosure in this area to show that they are being held accountable for their progress. A recent EY study — How can boards bridge the gap between sustainability ambition and action? — revealed key lessons for cross-functional collaboration and essential interdependent traits for board and management that drive sustainable business outcomes.

The disclosures analyzed for this year’s Barometer show that climate leaders are setting targets, monitoring emissions reduction and assessing their climate-related risks. Nevertheless, even these forward-thinking companies should aim to take the more ambitious action needed to accelerate decarbonization, transform their business models and address the threats they face.

So, what can policymakers, regulators and businesses do to drive more action on climate? Here are some top recommendations from the research.

Top three actions for policymakers and regulators:

1. Lead by example. Governments should promote accountability and transparency on the climate agenda by setting metrics and targets, as well as disclosing their progress against these targets in their reporting. They should also be open about the climate risks and opportunities facing their national economies.
   
   
2. Mandate all large companies to disclose sector-specific transition plans, including information on the amount of capital expenditures and operating expenses they have committed to transition. Transparency around transition planning will increase if companies know their peers and competitors are also publishing transition plans. Accounting frameworks could also be reviewed so that companies are required to specifically quantify the potential impact of their climate risks over the long term.
   
   
3. Develop a clear and consistent regulatory framework that contains the right mix of incentives and penalties to drive ambitious action. Companies can be incentivized to take action on climate through approaches such as grants and tax credits. Those companies that do not take appropriate action should be penalized through fines or loss of market access.

Top five actions for companies:

1. Start with a comprehensive approach. Companies should integrate climate goals into their core strategy by setting ambitious yet attainable targets and directing capital toward essential climate-related investments. This includes preparing for evolving scientific insights and the increasing impact of nature on business models. Strong governance is crucial, with board-level oversight on goal setting, progress tracking and investment decisions, potentially supported by appointing a board member with specialized climate expertise to uphold high standards.
   
   
2. Create and disclose an actionable transition plan. Companies should develop and publicly disclose a comprehensive, actionable transition plan that includes governance structures, emissions reduction targets aligned with the Paris Agreement, decarbonization strategies, shifts toward sustainable products and services, and transparent funding mechanisms, along with the assumptions and dependencies underlying the plan. By doing so, they commit to their climate goals and allow stakeholders to hold them accountable. The plan should also incorporate different future scenarios, assessing associated risks, opportunities and financial impacts, while outlining strategies to mitigate identified risks across different potential outcomes.
   
   
3. Reduce reliance on carbon credits. Companies should minimize reliance on carbon credits and instead focus on internal carbon pricing (ICP)⁵ as a strategic tool to drive genuine emissions reductions. While carbon credits can support short-term progress by addressing residual emissions, they have to be paired with credible and measurable decarbonization efforts and not used as substitutes for actual reductions. Realistic ICP helps companies prepare for a future where high carbon footprints are financially unsustainable, encouraging long-term planning and investment in low-carbon solutions.
   
   
4. Engage with your value chain and foster collaboration. To address the significant challenge of Scope 3 emissions and beyond, companies should actively engage with their value chains by encouraging suppliers to set net-zero targets and develop transition plans, thereby promoting climate action throughout the supply chain. Additionally, collaboration between the public and private sectors is essential for successful transitions, as public-private partnerships leverage private sector expertise and resources to accelerate the development of sustainable infrastructure and services.
   
   
5. Embrace artificial intelligence (AI) responsibly. AI tools present both significant risks and opportunities in the transition to net zero, as their high energy consumption can increase emissions, but they also offer powerful capabilities to support climate action. AI can optimize renewable energy operations, model future climate scenarios, plan low-emission transport routes, and enhance resource efficiency in sectors such as agriculture and manufacturing. When used strategically and responsibly, AI can be a transformative asset for companies aiming to accelerate their climate action goals.

Overall, the Barometer suggests a troubling lack of urgency on the part of companies when it comes to taking action that combats the climate crisis. Nevertheless, the research did indicate some progress on climate disclosures, which has largely been driven by regulatory developments.

Leaders and laggards

Improved quality of climate disclosures is noticeable in jurisdictions with strong climate reporting regulations, specifically the UK (which has a quality score of 69%) and the EU overall (which has a quality score of 60%). Companies in the UK and EU are also most likely to have a transition plan. While development in these markets is positive, limited improvement in India, the US and China is worrying given their shares of global emissions: according to the Global Carbon Budget (2023) and Our World in Data organisation, China (30.7%), USA (13.6%) and India (7.6%) accounted for 52% of the global annual CO2 emissions in 2022. (CO₂ emissions - Our World in Data).

The Middle East, Southeast Asia and India remain relative laggards on both disclosure quality and coverage compared with other jurisdictions, and although all three markets have seen their reporting quality improve by more than 20% since last year’s study they are still lagging the global average quality score which stands at 54%. Companies are increasingly choosing to report, albeit not at the scale needed, to meet the expectations of stakeholders who want them to act on climate issues and better integrate sustainability into their strategy and operations. For a detailed breakdown by country and markets see the full report.

Energy’s high score for disclosure quality reflects the sector’s exposure to transition risk as well as its role as an enabler of decarbonisation for other sectors. Still, less than half (43%) of the energy companies assessed for the Barometer had disclosed a transition plan, possibly for competitiveness-related reasons, while just 24% disclosed the quantifiable impacts of climate on their business.

The level of transition planning being undertaken by companies highlights their struggles to identify decarbonisation levers and commit to the action plans needed to achieve their climate goals. Just 41% of companies assessed this year said they had a transition plan, while 21% do not yet have a plan but have disclosed ambitions to put one in place.

Perhaps expectedly, companies that do have transition plans generally have a higher quality of climate disclosures.

Companies’ lack of action on transition is incongruent with the scale of their ambition on the climate agenda. Analysis of disclosures in relation to transition planning shows that the vast majority of the companies assessed (83%) have set short-term targets, aiming to achieve those targets by 2030.

Transition planning: a regional snapshot

The importance of setting a target

Targets are critical for accelerating the transition to a net-zero economy. When companies set targets, they are indicating that they intend to take strong climate action that is aligned with achieving the goals of the 2015 Paris Agreement and limiting global warming to 1.5°C above pre-industrial levels. Targets that have been validated by the Science Based Targets initiative (SBTi) are considered best practice because they set specific timelines for the rate at which companies must decarbonise to prevent the worst impacts of climate change.

Notably, just 24% of companies assessed for the Barometer have their short- and long-term targets validated by the SBTi, although this figure climbs to 41% of companies with an established transition plan. Companies could therefore do much more to align their target-setting with the science around climate change.

Overall, 78% of the companies assessed disclosed the scope of emissions considered in their targets. Half (50%) considered all three Scopes in their targets while 21% considered Scopes 1 and 2 only. In terms of their decarbonisation strategies, companies are prioritising reductions in Scope 2 emissions. Many of these reductions relate to reducing electricity consumption but the majority are indirect impacts through purchasing renewable energy via power purchase agreements or renewable energy certificates. The Barometer shows that companies are investing less in initiatives targeted at Scope 1 and Scope 3 emissions. This is a concern since Scope 3 emissions often represent the majority of an organisation's total greenhouse gas emissions, and reductions in these emissions are essential for companies to genuinely decarbonise their business models.

The Barometer shows that despite improved levels of climate disclosures across the markets and sectors, even companies with ambitious targets approved by the SBTi do not have detailed strategies to reach the target goals and develop transition plans that drive real-world action. Certainly, they face some genuine barriers to transition, including the pressure to balance profitability with achieving their carbon ambitions, practical challenges in addressing Scope 1 and Scope 3 emissions, and the unavailability and expense of low-carbon technology. Nevertheless, the transition to a net-zero economy will likely not happen without ambitious and meaningful action.

Companies should take these six core actions to accelerate their sustainability transition and shape the future:

1. Move transition to the core of the business agenda by developing a robust, actionable plan. This should be founded on science-based targets and outline clear short- and long-term targets for Scope 1, 2 and 3 emissions. It should be informed by robust scenario analysis and feature a clear decarbonisation strategy for the supply chain.
   
   
2. Reflect climate risk in the financial statements and explore potential opportunities. Companies should adopt quantitative analysis to measure the risks and opportunities associated with climate change, ensuring a direct connection to financial reporting. As well as quantifying the financial risk associated with climate transition, companies should explore potential opportunities such as new business models, a shift to new ways of working, or access to grants and incentives.
   
   
3. Use data to drive action. By capturing the right data in the right way, companies can use their sustainability information to inform real-time decision-making. For example, if companies are reporting comprehensively on the TCFD pillars, they can use the information to better prepare themselves for future climate challenges. Likewise, reporting on GHG emissions can help them in setting a target to reach net zero, and disclosing on strategy pillars can help them in devising ways to mitigate climate risks, plus putting a proper governance structure in place can help in embedding climate policies within an organisation, etc.  This will enable companies to better anticipate and respond to market risks and opportunities.
   
   
4. Provide the sustainability team with sufficient resources. The sustainability team needs the capacity to manage compliance while also leading on overall sustainability strategy and undertaking thoughtful work in vital areas such as climate risk analysis. Equally crucial is the strategic alignment, which can be achieved by positioning the sustainability function under the chief financial officer (CFO) or making sure that sustainability is embedded in each role within different business units.
   
   
5. Equip board members with the skills to understand and consider climate risk as part of a top-down approach. This can be achieved through training and education and by recruiting board members with specialist knowledge. Companies also need to link sustainability performance with executive compensation to incentivise executives to prioritise and achieve their climate-related goals, integrating them into strategic decision-making and daily operations. The 2023 EY Sustainable Value Study highlights how boards can drive delivery on sustainability ambitions by focusing on the dynamics of key executive roles and five strategic areas.
   
   
6. Explore cross-sector collaboration. By looking outside of their immediate ecosystems of suppliers and partners, businesses can create value in often unique ways, benefiting multiple stakeholders. As governments and the public sector are essential in driving progress towards net-zero targets, businesses could proactively align with regulatory frameworks, engage in public-private partnerships, promote transparency in monitoring and advocate for sustainable policies.