How are your climate change disclosures revealing the true risks and opportunities of your business?

2020 Belgium Climate Risk Disclosure Barometer 

The Intergovernmental Panel on Climate Change (IPCC) released a report in 2018 on the impacts of global warning of 1.5˚C and the emission pathways to achieve this goal. The results of the report are putting pressure on policy makers for more ambitious carbon policies, increasing the needs for investors to assess the impact on their investment portfolios and raising the awareness amongst business and consumers about climate change.

Companies need to understand the physical impacts of climate change and the risks associated with the necessary transitioning to a low carbon economy. Companies are also confronted with increased expectations of investors and other stakeholders to make better analyses and disclosures on their resilience to climate risks. The report assesses the state of play of Belgian companies of the level to which they incorporate climate change in their business strategy through their publicly available reporting.

The report assesses the state of play of Belgian companies of the level to which they incorporate climate change in their business strategy through their publicly available reporting. In line with the 2019 EY Global Climate Risk Disclosure Barometer we are using the TCFD recommendations as a framework to assess the quality of the disclosures. In 2017, the industry-led Task Force on Climate-related Financial Disclosures (TCFD), set up by the financial stability board (FSB), finalized its recommendations on financial climate risk disclosures. They aim to improve investor’s and corporates’ understanding of the impact of climate risks and to reduce the risk of a systemic financial shock to the economy due to climate change. The TCFD recommendations provide companies with a comprehensive framework to systematically report the impact of climate risks and opportunities.

This report provides insights in the uptake of the TCFD recommendations across a selection of 56 companies in Belgium, both listed and non-listed, across 10 different sectors.

The purpose of this report is to help companies understand the current state of climate reporting and to indicate areas for improvement across the different sectors.

Key findings

Our analysis shows that two out of three companies assessed have disclosed some climate-related risks. This  proves that many companies are aware of the challenges related to climate change. There is however room for improvement, especially in terms of quality of disclosures. The overall score of 31%  shows that the level of detail of information is still limited. The responsiveness to the TCFD recommendations differs significantly within every sector. The scores in each sector vary considerably between one or a few high performers, a middle bracket and a number of low-performing companies.  Assessing climate-related risks and opportunities is complex and requires detailed analysis on how climate change impacts a business and how the business is responding. The majority of companies have yet to report on the potential financial impact that different climate scenarios could have on their business, strategy and financial planning. Climate change scenario planning not only addresses the TCFD recommendations, but also – and primarily – provides companies with new inputs into business strategy  and planning, which enhances internal capabilities and  processes.

Almost the entire economy will be facing major disruption from climate transition and climate impacts over the coming years. Yet, a majority of companies are not engaging strategically with these risks or positioning themselves to take advantage of potential opportunities. With investors paying increasing attention, this is likely to affect their valuation even before the impacts are fully realized.

1. Average results per TCFD component

The TCFD recommendations which companies reported best on are “metrics and targets” (mainly driven by reporting on Scope 1 and 2 greenhouse gas emissions) and “governance” in the second instance. Disclosures relating to “strategy” and “risk management” were less developed.

2. Belgian versus global results

While the TCFD recommendations are globally the most recognized framework for climate-related disclosures and analyses, full compliance is for companies worldwide a challenging exercise. The average results of the Belgian study are fully in line with the results of the Global Climate Risk Disclosure study.

3. Average results per sector

The Real Estate sector has the highest scores, in terms of coverage and quality of the disclosure. This sector is followed by the Technology sector. The ‘Banking and Asset Manager’ sector came in third place. In addition, the ‘Manufacturing’ sector scored relatively well.

These sectors are significantly impacted by transition risks, for example: exposure to fossil fuel supply chains for the Technology companies, changes in climate and energy policies for Real Estate companies. regulatory and commercial pressures for banks or accessibility to low carbon substitutes for manufacturing companies. 

At the other end of the spectrum, ‘insurance’ companies and ‘holding’ companies were the underperformers. This finding is consistent with the Global Climate Risk Disclosure Barometer and highlights a global issue with climate risk disclosures of these sectors. However, the companies in the holding sector especially have expressed their commitment to strategically address the impacts of climate change and to manage the required transition.

Next to the sector company size is also a determining factor for the quality of climate reporting. Whether a company is listed or not influences the coverage and quality of the disclosures even more. The larger the company, the more detailed information can be found, especially when the company is listed. In contrast to listed companies, we notice that family owned companies communicate less information. Furthermore, CDP reporting contains more details than annual reporting or communication on the website. The presence of CDP answers is thus a decisive factor for company scores.

Observations & recommendations

Climate reporting versus non-financial reporting

When comparing climate reporting with reporting practices in non-financial or sustainability reporting we can conclude:

• The annual report is replacing the sustainability report: climate related information is increasingly embedded in the annual report instead of a separate sustainability report or on the website. To keep the readability and conciseness of annual reporting, companies use a combination of communication channels. Where general information on climate can be found in the annual report, more detail is provided in CDP reporting.
• Integrated Reporting (Framework by the IIRC) is an evolution of corporate reporting based on the principle of connectivity of financial and non-financial information. The companies reporting along the principles of Integrated Reporting are able to better quantify the impacts of climate related risks, link them to overall risk management and report on the governance topic in an integrated manner.
• Companies often present company risks and opportunities by using a materiality matrix. The term ‘climate change’ and environmental issues related to climate change are increasingly popping up in these matrices.
• The focus in non-financial reports lies increasingly on climate impact and CO2 emissions: Scope 1, Scope 2 and often Scope 3. More and more, quantitative objectives are set to support carbon reduction strategies. Increasingly, these are science-based CO2 targets, in line with the Paris Agreement goals to limit global warming.
• Use of different reporting frameworks: even though the majority of the companies use the Global Reporting Initiative (GRI) to report on non-financial data, companies often use a combination of standards: GRI, the Sustainable Development Goals (SDG), Climate Disclosure Standards Board (CDSB) or Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. As the availability of non-financial information is rising, so does the complexity and the need for harmonized and reliable climate and other non-financial information.