Climate change acknowledged but not explored
Though companies increasingly disclose climate change risk, the quality of those disclosures still lags.
Most companies now commonly acknowledge climate change as a material issue, either in their annual or sustainability reports. But a majority of highly exposed companies still lack high-quality climate disclosures.
The analysis shows that 54% of the 970 companies assessed disclose climate change-related risks. The more concerning element is the quality of these disclosures, which were scored at 27%.1
As with the 2018 findings, the results show that across the TCFD elements, on average, companies reported better on “governance” and “targets and metrics,” with disclosures relating to “strategy” and “risk management” remaining the least developed.
Although companies are now including climate change risks in their annual or sustainability reports, they are struggling to disclose how climate change may impact their business and how they are responding.
Two primary areas that are critical to the management of climate change risk and are generally not addressed are:
- Forward-looking climate scenarios
- The integration of climate risk management into the overall enterprise risk management process
Given the increased focus on these two areas over the last year, an uplift is expected in reporting on such disclosures in the next reporting cycle through 2020.2
Sector performance aligned to transition risk exposure
Stakeholder activism on improved climate disclosures appears to be having an impact.
Sectors with the most significant exposure to transition risk generally scored higher for their disclosures. These include the banks, energy, manufacturing and transport sectors, but more widely encompass sectors with these conditions:
- High emissions
- Direct exposure to fossil fuel supply chains
- Investments in the energy sector or with readily accessible low-carbon substitutes
These sectors have faced the bulk of stakeholder activism around improved climate disclosures. Actions, such as lawsuits and shareholder resolutions relating to climate risk, have been directed toward the largest global companies within these sectors. These actions appear to have had a direct impact and have encouraged companies to improve their disclosures compared with the other sectors in this analysis.
The average coverage score of TCFD recommendations by companies in the financial sector.
The financial sector has faced significantly higher levels of regulatory scrutiny compared with other sectors and as a whole was expected to score more highly. The sector includes:
The banks maintained a similar level of performance compared to 2018, despite the expanded coverage of the 2019 analysis, including less mature countries. However, both the insurance and asset owners and managers lost 10% and 4% respectively on coverage of the recommendations compared with the 2018 results.
This could potentially be due to new entrants in the data used for the 2019 analysis. When the score was compared on a like-for-like basis, the insurance sector’s score was found to have increased by 4%, and the asset owners and managers did not improve year-on-year.
Similar to 2018, the asset owners and managers underperformed across all sectors. This finding highlights a global issue with the climate risk disclosures of companies within this sector. This is despite well-established initiatives targeting investors, including the Montreal Pledge and the Portfolio Decarbonization Coalition.
It was not surprising that overall companies within the energy sector were again top performers in 2019, achieving an average score of 66% for coverage and 36% for quality of TCFD recommendations. The sector includes major oil and gas and energy utility companies that have faced scrutiny from investors, direct shareholder action and increased pressures from changing public opinion. Data used in the 2019 analysis included a number of new companies from large oil-producing markets. The disclosure scores for these new entrants were low compared with others in the sector, which likely reflects the lack of focus by companies and shareholders on climate risks and opportunities despite the relatively high carbon intensity of the sector.
The top performing companies were predominantly from European markets, including Spain, France, Italy and the UK. Within these markets there has been increased legislative influence from new directives such as the Extra-Financial Performance Declaration. Companies in the Australian market continued to perform strongly in the face of increased pressure on climate risk disclosure from regulators and potential new legislation.
Leading companies in the energy sector had also disclosed new types of information, providing stakeholders with additional information related to their action around climate-related risks and opportunities. For example, some companies included metrics related to investments in low carbon technology, information on the effectiveness of carbon capture technologies, targets to phase down fossil-fuel generated electricity, and how an internal carbon price is used in decision-making. These metrics had been included across multiple forms of reporting, including a company’s annual report.
Read more about the energy sector
Manufacturing and transport sectors
The average coverage score of TCFD recommendations by companies in the transport sector.
The manufacturing and transport sectors are large contributors to global fossil fuel emissions, and certain industries within these sectors are exposed to competition from low-carbon technologies, such as electrification and resource-efficient manufacturing.
Responding to the challenges from these disruptive technologies appears to have positively impacted the risk management and strategy disclosures from some companies within these sectors. Overall, businesses within these sectors had better defined climate risks and opportunities. Also, in some cases, they had included disclosures around time frames and quantification of the potential impacts.
Read more about these sectors:
Disclosure’s best and worst markets
Better-performing markets are generally linked to some form of national regulation.
The quality of information disclosed varies significantly across markets, with better-performing markets generally linked to some level of national regulation or environmental, social and governance (ESG) performance.
On average, higher coverage scores for companies continue to be linked to the maturity of the markets, where government, shareholders, investors and local market regulators are active.
The best-performing (and worst-performing) markets have not changed significantly since 2018. On average, higher coverage scores for companies continues to be linked to the maturity of the markets, where government, shareholders, investors and local market regulators are active. This includes companies who continue to score highly despite the lack of coordinated economy-wide policy directives in countries such as:
- United Kingdom (UK)
- South Africa
- United States (US)
Companies based in the US presented the highest score on quality of disclosures with an average of 63% (vs. 27% on average) and showed the biggest year-on-year improvement with an increase of over 21 points compared with 2018. This could be attributed to the prevalence of shareholder resolutions and the threat of class action lawsuits, which continue to grow.
Activism spikes the US rise21%
increase in quality of TCFD disclosure from the US-based companies, pushed by shareholder and legal pressures, compared with 2018.
In Australia and some European countries (UK, France and Germany), the higher maturity could be explained by the involvement of the local market authorities for listed companies, and prudential regulators that have signaled to the financial and nonfinancial sectors their expectations regarding climate-risks management and disclosures.
The lowest performing markets include previously reviewed countries such as:
New countries added to the 2019 analysis that also ranked low:
- Saudi Arabia
This most likely reflects the lack of focus on climate risks and opportunities by companies, shareholders and market regulators within these countries, despite the relatively high-carbon intensity of their economies.
The gap between the best- and worst-performing markets, in terms of quality, was higher than expected — around 50 points. This reflects the progress made by companies operating in climate-mature markets since the implementation of the TCFD recommendations. In addition, the alignment of the CDP questionnaire to certain elements of the TCFD has helped companies, with long-standing CDP reporting practices, to better explain the impacts of climate risks and opportunities.
Around the globe
- The US market continued to score highly despite the lack of coordinated economy-wide policy directives. This could be attributed to the prevalence of shareholder resolutions and the continued threat of class action lawsuits.
- Within the South American region, the Brazilian market was a leader on coverage (89% on average) and quality (42% on average). This is likely because of the high level of CDP reporting among local companies.
- Markets in France, Spain, the UK and Germany were leaders within the European region. This is likely because of momentum from the nonfinancial and diversity information directive, and pressures from the local market regulator.
- The French market has remained a global leader in disclosures, both globally and within Europe. This could be partly attributed to the establishment of Article 173 within France’s Energy Transition Law. This requires all major companies to evaluate, disclose and address their exposure to climate-related financial risk. In addition to the French mandatory disclosure regime, the local market regulators (Autorité de Contrôle Prudentiel et de Résolution (ACPR) and the Autorité des Marchés Financiers (AMF)) have announced the implementation of a mechanism for monitoring and assessing the climate-related commitments taken by French financial institutions. This mechanism will be managed by the ACPR and the AMF, as part of their respective duties to supervise banks, insurance companies and asset management companies, and to review the information disclosed by issuers related to their extra-financial performance.
- New UK guidelines were issued by the UK Prudential Regulation Authority (PRA) to improve climate risk disclosure practices. The UK PRA expects insurance companies to provide the board and relevant sub-committees with management information on their exposure to financial risks from climate change. Also, the Climate Financial Risk Forum (CFRF), co-chaired by the UK PRA and UK Financial Conduct Authority (FCA), has set up four technical working groups on disclosure, scenario analysis, risk management and innovation. These are designed to build capacity and share leading practices across financial regulators and industries, and to aid the sector’s responses to the financial risks from climate change.
- The Australian market remained one of the few leaders in the Asia-Pacific region. The release of the joint bulletin on assessing financial statement materiality for climate-related risk disclosures by the Australian Accounting Standards Board (AASB), and Auditing and Assurance Standards Board (AuASB) has further increased the expectation on Australia’s companies to consider climate risk, not only in financial filings but also in financial statements. While these disclosures are currently voluntary, it is setting the scene for greater focus on climate risk in the financial statement.
- The South Korean market has improved year-on-year, with an average coverage score of 64% and a quality score of 36%. This is likely driven by high-performing banks, and the significant increase of the score observed for the manufacturing and transport sectors in 2019 when compared with 2018. This is supported by the maturing mandatory reporting requirements (despite the local nonmandatory sustainability corporate disclosures), and the growing awareness within Korean companies of the exposure of their value chain to climate transition and physical risks.
- The Chinese market remained a low performer, with an average coverage score of 8% and a quality score of 2%. Companies in the market showed little improvement in their disclosures despite the uptake of the Chinese carbon policy. This is probably because the risk of litigation and penalties have remained low. It is also important to note that the UK-China Green Finance Taskforce has committed to launch a pilot program on environmental information disclosure consistent with recommendations from the TCFD.
- The South African market has remained one of the top performers with an average coverage score of 83% and a quality score of 49% — a year-on-year increase of quality of more than 9% compared with 2018. This could be attributed to the mandatory greenhouse gas reporting regulation and the regulatory instruments designed to enhance the financial sector’s inclusion of environmental risks and sustainability (the King Code, Regulation 28 and the Code for Responsible Investing in South Africa). In addition, a review of the financial sector regulatory framework has sought to enhance climate-related disclosures, reporting and monitoring to support decisions.
- The market in Canada has improved year-on-year with an average coverage score of 67% and a quality score of 34%. This is likely driven by the increase of the financial sector in the Canadian market place, where banks and insurers have shown the highest coverage across all sectors with 97% and 100% respectively. These improvements have compensated for the decrease observed for the energy, mining and transport sectors between 2018 and 2019. The Canadian Securities Administrators (CSA) has issued new guidance for companies. The CSA Staff Notice guidance 51–358 Reporting of Climate Change-related Risks provided guidance for companies on existing continuous disclosure requirements relating to climate change risks and opportunities.
- The New Zealand market (new entrant for 2019) is a low performer, with an average coverage score of 35% and a quality score of 17%. This can be partially explained by the exclusion of dual-listed companies (Australia and New Zealand), as climate risk disclosures tend to be managed by the parent-entity level, and a number of New Zealand’s largest companies have Australian parent entities. Within this market, the energy sector is the best performing followed by the transport and real estate, and buildings and construction sectors. Surprisingly, the agriculture, food and forest products are further behind both on coverage and quality of the disclosures.
Investors’ influence on companies in their portfolio
Investors’ commitments on climate change issues can clearly be seen in the TCFD disclosures of their portfolios.
There is a clear connection between an investor’s commitment on climate change issues and the TCFD disclosures score of their portfolio. Within the sample of companies analyzed, close to a dozen investors accounted for more than 5% of the shares of the assessed companies. Based on this small sample, it was found that companies that had an investor with a strong public stance on climate change reported higher overall scores.
This indicates that investors may be influencing companies within their portfolios. Although on the other hand, this may also indicate that investors are “walking the talk” and investing in companies that demonstrate assessing and disclosing climate-related risks. Either way, investors’ awareness on climate risks and opportunities is growing, as shown in the EY 2018 investor survey, which showed that 48% of investors surveyed would rule out an investment immediately on the basis of climate risk disclosures (up from 8% in 2017). And the vast majority (92%) said that climate change issues would affect their investment decisions.
Physical risk disclosures fall behind
Companies are again identifying more transition risks than physical.
Disclosures on physical risks continue to fall behind disclosures on transition risks. Companies are also not utilizing climate scenarios, which is reducing their ability to stress test exposure to climate risks and assess resilience in a future decarbonized economy.
Similar to EY 2018 analysis, companies identify more transition risks than physical risks in their disclosures. In terms of the transition risks assessed by companies, which were commonly reported within CDP responses, the risk of increased pricing of greenhouse gas emissions was most commonly considered as a material issue by companies. For physical risks, companies identified acute events as a material issue relevant to their operations and supply chain.
The elaboration and use of climate scenarios, or lack thereof, continues to be a major gap in a companies’ reporting. Less than 10% of the assessed companies disclosed the use of climate scenarios (similar to 2018 findings).
or less of the assessed companies disclosed the use of climate scenarios.
For those companies who did disclose climate scenarios, transition scenarios are more commonly disclosed than physical scenarios. Of the companies who did disclose transition scenarios:
- A majority reported using a 2°C scenario (2DS), aligned with the International Energy Association (IEA) 2DS. The 2DS lays out an energy system pathway and a carbon dioxide (CO2) emissions trajectory consistent with at least a 50% chance of limiting the average global temperature increase to 2°C by 2100.
- To a lesser extent, they used the Science-based Target (SBT) scenarios or countries’ nationally determined contributions (NDCs).
- Several top-performing companies developed their own internal scenarios.
- They equally used a single transition scenario, two or three scenarios and a small number of companies used four scenarios.
- Very few provided details in relation to key parameters and assumptions applied.
The elaboration and use of climate scenarios, or lack thereof, continue to be a major gap in a companies’ reporting.
For the companies that disclosed physical risk scenarios, those companies either used one or two scenarios from the Intergovernmental Panel on Climate Change (IPCC), including the most commonly used Representative Concentration Pathway (RCP) 8.5 and RCP 2.6. Other scenarios used by companies included RCP 4.5 and RCP 6.0.
Climate-related risks and the financial impact
Financial estimations often remain disconnected from climate scenarios and are still not integrated into companies’ financial statements.
Companies are attempting to provide a quantitative estimation of the financial impact of climate-related risks and opportunities. But these estimations often remain disconnected from their climate scenarios and are still not integrated into companies’ financial statements.
Less than 10% of the assessed companies provided some form of quantitative estimation of the financial impacts of their climate-related risks and opportunities (similar to 2018). In most cases, these financial impacts were disclosed in the CDP responses.
Among this small group of companies, only a small number (8% of this sample — being the leading companies) made a connection between the financial repercussion of climate risks and a climate scenario. Other companies (27%) provided a quantitative and detailed description of the methodology used to estimate the financial impacts. However, the majority (65%) provided limited quantitative information and only a vague explanation regarding the methodology used to assess the financial impact.
of companies provided limited quantitative information and only a vague explanation regarding the methodology used to assess financial impact.
The majority of the companies who evaluate the financial impacts of climate risks considered these impacts as nonmaterial. However, in some cases, the estimated financial impacts disclosed accounted for more than 10% of the companies’ annual revenue. More specifically, in some instances, the financial impacts of physical risks could represent up to 14% of the companies’ annual revenue and up to 6% of the companies’ annual revenue could account for the transition risks. Although these ratios could indicate a potential material impact for these companies, the lack of information on the time horizon of the impact significantly reduced the ability to assess its materiality.
A few top performers in the food and transport sectors provided a detailed description of the climate-related issues and the materiality determination process. This included information, such as mode and frequency, criteria for materiality, level of stakeholder involvement, and the link to the value chain.
There are a number of sector-specific metrics that have been developed and which are yet to be adopted by the companies analyzed in this report. These include the TCFD and the European Commission’s technical expert group on sustainable finance for the financial sector. It also includes the Sustainability Accounting Standards Board (SASB) with TCFD supplemental guidance for non-financial sectors to assist companies in disclosing information related to potential impacts on revenues; operating and production costs; assets and liabilities; capital allocation and investments; and business interruption.
For the small group of companies disclosing the financial impact of climate risks and opportunities in their CDP report, relevant qualitative or quantitative information was not provided in the companies’ financial statements.
Nonfinancial disclosures informing investment decisions
Investors are relying on annual reports, but this is not the primary location for information relating to climate-related risks.
The EY 2018 Global Investor Survey found that investors are increasingly using nonfinancial disclosures from companies to inform investment decisions. However, the survey also showed that investors primarily rely on annual reports for gathering information and also consider sustainability reports, corporate website or sustainability rankings produced by third parties.
This is not reflected where companies are disclosing information related to the TCFD recommendations. The analysis showed that CDP responses remain a primary source of detailed disclosure, alongside sustainability reports (and in rare cases, stand-alone climate risk reports). This year, more relevant information was found in annual reports. However, this is not yet the primary location of information relating to the way in which climate-related financial risk is managed by a company.
What are the next steps?
A company should act now to avoid potential reputational damage and loss of value.
Disclosing climate-related risks likely involves changes to the governance and risk assessment processes (as per the TCFD recommendations). It also likely requires collaboration across the sustainability, risk, finance, operations and investor relations business functions. It could take several reporting cycles before it is possible to generate valuable information that can be used to make informed decisions by investors and stakeholders. During that time, it is likely that there will be more divestment announcements, direct stakeholder action, new regulation, and guidance on disclosures and leading practices.
To be in a position to assess the business impacts and opportunities of climate-related risks, companies should act now. It may be necessary for companies to familiarize themselves with the scenario-analysis process, including the analytical choices they may face. Companies may also need to understand the vast amount of information required for each parameter to develop appropriate assumptions specific to their sector and aligned (at a minimum) to a 2DS.
A wait-and-see approach could increase the risk of short-term reputation damage, and the loss of value. The time to act is now.
About the report
The 2019 EY Global Climate Risks Disclosure Barometer provides an annual overview on the alignment of companies’ climate-related risk disclosures with the recommendations across sectors likely to be highly impacted worldwide.
This assessment provides not only companies, but also external stakeholders of all types, such as national regulators, financial institutions and investors, an understanding of the current state of global climate risk reporting. The first edition was issued in December 2018.
In addition to the annual snapshot of companies’ uptake of the recommendations, the 2019 edition (which comprises a wider sample of 970 companies in 34 countries) uncovers trends and focus points, including:
- Connections between substantial shareholders and the quality of climate-related disclosures
- The evolution and improvement of climate-scenario analysis
- The translation of climate-related risks into financial impacts
The TCFD recommendations aim to improve an investors’ understanding of the impact of climate risks on different corporations and reduce the risk of a systemic financial shock on the economy due to climate change. The recommendations provide a reporting framework for climate risks that can be integrated with current financial reporting disclosures. They define climate impacts as:
- Transition impacts which reflect the risks and opportunities associated with changes in the economy, including growth impacts, sector re-weighting and other macroeconomic factors.
- Physical impacts which reflect the changes in the physical climate (e.g., altered rainfall amounts, intensities and timings) that may impact future business activities.
The TCFD recommendations also provide specific guidance for certain high-risk sectors, such as banks, insurance companies, asset owners and managers in the financial sector, and in other sectors, such as energy, transportation, agriculture, food and forest products.
The adoption of the TCFD recommendations are voluntary in most countries (although certain elements have been legislated in France). However, several national-level regulators and global investors have publicly supported the recommendations, and are driving an early uptake on the disclosures. The increasing level of shareholder activism is driving companies operating in high-risk sectors to pay closer attention to their disclosures and familiarize themselves with the recommendations.
This analysis assesses the TCFD disclosures of the largest public companies in high-risk sectors (as identified by the TCFD recommendations) in the following countries:
Number of companies analyzed
1 Argentina 30 2 Australia 34 3 Belgium 29 4 Brazil 31 5 Canada 52 6 China Mainland 32 6 Colombia 31 8 France 34 9 Germany 30 10 Hong Kong 4 11 India 37 12 Indonesia 30 13 Ireland 34 14 Italy 33 15 Japan 31 16 Kazakhstan 32 17 Kuwait 3 18 Malaysia 30 19 Mexico 33 20 Netherlands 35 21 New Zealand 35 22 Philippines 34 23 Portugal 37 24 Qatar 4 25 Russia 31 26 Saudi Arabia 9 27 Singapore 35 28 South Africa 25 29 South Korea 24 30 Spain 30 31 Taiwan 33 32 UAE 7 33 UK 28 34 US 33 Total 970
Structure of the analysis
The analysis groups companies into sectors that correspond to the sectors identified in the TCFD recommendations and other key sectors of the global economy.
Global Climate Risk Disclosure Barometer Sectors identified by TCFD as most exposed to risk Number of companies reviewed in 2018 Number of companies reviewed in 2019
Financial services sector
Banks Banks 75 121 Insurance companies Insurance companies 49 69 Asset owners and managers Asset owners
58 82 Other sectors Agriculture, food and forest products Agriculture, food and forest products 67 91 Energy Energy 77 114 Manufacturing Materials and buildings 54 86 Buildings 47 92 Mining 19 65 Transportation Transportation 65 84 Retail, health and consumer goods N/A 37 98 Telecommunications N/A 11 68 Total 559 970
The scope of the 2019 report was expanded from 2018 (specifically for the following cases):
- The number of assessed companies and participating countries is 73% larger than in the 2018 report.
- The assessed companies have been selected on the basis of market capitalization. Hence, countries that participated in both the 2018 and the 2019 reports might see minor changes to the list of companies assessed depending on the year-on-year change to the market capitalization.
Because of these changes, it was not possible to include a meaningful in-depth year-on-year analysis. While the year-on-year evolution is displayed and briefly commented on, the main analysis of the most detailed sections of the document, therefore, remain at sector-level and focus on each of the four TCFD components.
Core elements of recommended climate-related financial disclosures include the following:
The organization’s governance around climate-related risks and opportunities
The actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy and financial planning
- Risk management
The processes used by the organization to identify, assess and manage climate-related risks
- Metrics and targets
The metrics and targets used to assess and manage relevant climate-related risks and opportunities
Companies were scored on two different metrics — being the coverage and quality of disclosures
Companies were assigned a score (in percentage) on the basis of the number of TCFD recommendations addressed by them. A score of 100% indicated that the company had disclosed some level of information compliant to each of the recommendations, regardless of the quality of information provided.
Companies were given a rating (out of five) on the basis of the quality of the disclosure, expressed as a percentage of the maximum score, should the company implement all 11 recommendations.
A score of 100% indicates that the company had adopted all the recommendations and the quality of the disclosure met all the requirements of the TCFD (i.e., gaining a maximum score of 5 for each of the 11 recommendations).
The quality of the disclosures was scored using the following scoring system:
- 0: Not publicly disclosed
- 1: Limited discussion of the aspect (or only partially discussed)
- 3: Aspect discussed in detail
- 5: Addressed all features of the aspect in the disclosure
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- Quality for 2019 has decreased compared with 2018 because of expanded sample, including countries from less mature markets. For those countries included in 2018, quality has only increased marginally (5 points on average). View the full details of the scoring methodology.
- It is not possible to compare year-on-year movements between the scores because of a significantly extended regional coverage between the 2018 and 2019 EY Global Climate Risks Barometer.
The 2019 EY Global Climate Risk Disclosure Barometer provides a snapshot of the uptake of recommendations by the Task Force on Climate-related Financial Disclosures (TCFD). It examines disclosures from over 950 companies across a range of sectors in 34 markets during the 2018–19 reporting period.
Compared with the 2018 findings, companies have made limited progress in addressing the quality and coverage of disclosures. This is at a time of increased pressure and incentivization designed to enhance reporting of climate-related risks. The findings raise questions about the reasons for the lack of progress and actions required to move forward.