11 minute read 22 Sep 2020
How are your climate change disclosures revealing the true risks and opportunities of your business?

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

By

Céline De Waele

EY Belgium Climate Change and Sustainability Services Senior Manager

Guiding businesses and (non-profit and public sector) organizations in the process of implementing sustainability and circular economy.

11 minute read 22 Sep 2020

2020 Belgium Climate Risk Disclosure Barometer 

In brief

  • Companies need to understand the risks and even the potential opportunities associated with the impacts of climate change.
  • At the same time, investors and other stakeholders expect them to make better analyses and disclosures on their resilience to risks. 

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.

Average results per TCFD component

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.

Belgian versus global results

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.

Average results per sector

Observations & recommendations

  • Embedding climate risks in company strategies

    ‘It’s time to stop debating the role of companies in addressing the climate emergency’ - is also a key finding of the EY 2019 CEO Imperative Study. Boards, CEOs and investors agree on the main global challenges of our time — including climate change — and overwhelmingly believe businesses should take the lead in addressing them.

    Climate change is being acknowledged, but climate risk factors are not structurally embedded into the overarching company strategy and risk management system. This has resulted in high-level approaches to climate-related risks and opportunities. However, the disclosure of the impact is often missing. The reason therefore is that climate risks are often long-term and more complex in nature than traditional business risks, which contributes to a lack of understanding and measurement of their potential impacts.

    Embedding climate change in a company strategy requires changes to the governance system. Good practices are, for example, education of the board and management and introduction of sustainability-related management remuneration. It also requires changes to the risk assessment processes and the utilization of climate scenario analysis to assess the current strategy’s resilience. Interviewees have mentioned that risk teams struggle with the uncertainty linked to long time horizons, the qualitative and incomplete data and the lack of a uniform methodology.

  • Alignment between material risks and climate-related metrics

    Overall, the assessed companies disclose some climate-related metrics, but often not fully linked to the material climate-related risks they are exposed to. For example, most financial institutions disclose CO2 emissions in relation to their own operations, but disclose very little on the CO2 emissions from investments and lending activities. Overall, the scope of climate-related metrics is confined to Scope 1 and 2 CO2 emissions. The companies that do report on Scope 3 emissions often only included non-material emissions such as business travel.

    Climate-related risks should be seen as material financial risks by management and board. The materiality determination process for climate-related issues should be described in detail. This includes information such as mode and frequency, criteria used, level of stakeholder involvement and link to the value chain. Companies should focus on and disclose their most material Scope 3 emissions. Therefore, it is necessary to achieve a higher degree of standardization in Scope 3 emissions.

  • Assessment of the financial impact of climate risks through scenario-planning

    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. The majority of the companies disclose some climate-related risks and impact in a high-level, qualitative way. The ones that provide a quantitative estimation of the financial impact, often do not give information on the calculation method or connection with their climate scenarios. The information is mostly not integrated into the financial statements, but only disclosed in the CDP responses. Companies struggle with the collection of accurate data given the uncertainty embedded within future projections.

    We recommend companies to use scenario-analysis to assess the potential financial impacts of climate change on their business in more detail. The companies who performed a scenario-analysis use a 2°C scenario, aligned with the International Energy Association (IEA). Their scenario lays out an energy system and carbon dioxide (CO2) emissions trajectory consistent with at least a 50% chance of limiting the average global temperature increase to 2°C by 2100.

    A few top-performing companies use the Science-Based Target (SBT) scenarios. However, we have noticed that more companies are in the process of implementing scenario-analysis by 2020.

  • Standardization of the information disclosed in corporate reports

    The analysis indicates that the companies that report to CDP provide more comprehensive disclosures on climate-related risks than companies that do not report to CDP. This is driven by the structured nature of the CDP questionnaire which includes the TDFD recommendations. The section of the CDP questionnaire related to governance, strategy, risk and opportunities aligns closely with TCFD’s core areas.

    For the majority of the companies included in the study we identified a degree of disparity between the disclosures made in the CDP reports and their broader corporate communication, including the annual or sustainability report and information on the website. This indicates a lack of alignment between the different communication channels. We recommend that companies link the core content of the reports, though understandably more condensed in the annual or sustainability reports than in CDP answers.

    The interviews show that many companies are struggling with their environmental communication. While they recognize the benefits of transparency and reporting, there are ongoing discussions on what, how, where and when to communicate in order to provide an accurate and attractive report to a variety of stakeholders.

  • The importance to keep the focus on climate change in a COVID-19 reality

    However impacting the COVID-19 crisis is, climate change remains one of the most pressing economic and environmental challenges globally. Until now, both public and private institutions have not taken action quickly enough to avert the climate crisis. The emergence of COVID-19 shows the importance of long-term thinking and embedding this into strategies and risk management processes.

    During interviews with 25 CEO’s and sustainability leaders, we enquired about the impact of the COVID-19 crisis on the climate commitments of their companies. The general sentiment was that the crisis is not jeopardizing the companies’ strategies because climate change risks are just as present now as they were before the pandemic. Thus, while dealing with the immediate challenges posed by COVID-19, maintaining strategies and programs that reduce risks are perceived to be just as important for building organizational resiliency. Some claim that there is likely to be a renewed focus on sustainability and climate change at board level as non-executive directors in particular ask questions about whether companies’ governance frameworks are adequate to deal with crisis situations and megatrends.

    As our governments are analyzing and executing ‘post-Covid’ resilience plans, it is important that they include high ambition levels with regard to climate change mitigation. As such, supporting the business community to lower their emissions, develop smart solutions and setting the right example to meet the global Paris agreement is a minimum expectation. Companies have expressed their concern about the fractured efforts of our governments to lead the private sector through the crisis.

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.

Expert views

This study has been launched by a webinar on September 22nd 2020. Part of this was a panel debate in which representatives of the business community, the government and NGOs expressed their views on what is needed to meet the objectives of accelerating the carbon transition and ensuring an economic recovery.

The quotes below summarize some of the views expressed.

Climate reporting must be meaningful for preparers as for users. It is not a compliance exercise but the opportunity for a company to demonstrate its ability to tackle climate change.
Michèle Lacroix
Chair of the Project Task Force on Climate-related Reporting, EFRAG
All future investments will need to be climate-proof, or run the risk of becoming stranded assets. For investors to act correspondingly, regulatory frameworks must ensure that clear, complete and comparable information on all relevant companies’ exposure to climate risks, is available to all players.
Peter Wittoeck
Head of Climate Change Section Federal Public Service Health
Climate Change will have a big impact on companies’ business models. Their whole value chain is likely to be affected, as well as their clients. Companies that are at the forefront of climate action will stand to win goodwill, reputation and market share. Adapting strategies and aligning business practices to the objectives set in the Paris Agreement will make companies future proof and able to thrive.
Antoine Lebrun
WWF Belgium CEO
Reporting on climate risks is becoming increasingly important for resilient companies as well as for their shareholders and other stakeholders. We must make sure that this development is consistent and remains ultimately dedicated to sustainable value creation.
Philippe Lambrechts
Secretary General, VBO/FEB

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Summary

Almost the entire economy will be facing major disruption from climate transition and climate impacts over the coming years. Nonetheless, 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.

With this in view, the Barometer provides insights into the reporting recommendations of the Task force on Climate-related Financial Disclosures that cover governance, strategy, risk management and metrics.

About this article

By

Céline De Waele

EY Belgium Climate Change and Sustainability Services Senior Manager

Guiding businesses and (non-profit and public sector) organizations in the process of implementing sustainability and circular economy.