- Climate risk disclosures by Malaysia’s PLCs score 34% on coverage and 12% on quality of reporting when benchmarked against the global Taskforce on Climate-related Financial Disclosures (TCFD) recommendations
- Time to factor in potential impact of climate risks when rebuilding business resilience
According to the inaugural EY Climate Risk Disclosure Barometer (CRDB) 2020 Malaysia, Malaysia’s top 100 public-listed companies (PLCs) lack comprehensive climate risk disclosures, scoring only 34% for coverage of climate change-related risks and 12% for quality of the disclosures. The scores were higher for coverage of metrics and targets at 45%, followed by risk management at 41%. Coverage of governance and strategy was lower at 22% and 24% respectively.
The findings were based on the analyses of reporting disclosures by the PLCs, benchmarked against the global Taskforce on Climate-related Financial Disclosures (TCFD) recommendations in four areas, namely, governance, strategy, risk management, and metrics and targets.
The COVID-19 pandemic has reinforced and accelerated the need for governments and businesses to re-prioritize their management of the environmental, social and governance (ESG) issues that have the potential to inflict damage to economies and to drive a more balanced policy approach towards inclusive and long-term sustainable growth.
Arina Kok, Director, Climate Change and Sustainability Services, Ernst & Young Advisory Services Sdn Bhd, says, “As communities and economies struggle with the COVID-19 pandemic and with climate change trends increasingly apparent across regions, a “wait-and-see” approach could heighten the risk of not developing comprehensive and robust strategies to strengthen business resilience.
“In fact, the wider ESG issues arising from climate change are a concern to Malaysia’s economic resilience, recovery and sustainability agenda, which was a focal point in the recently tabled Budget 2021. There is significant scope for Malaysia’s PLCs to leverage climate risk assessment to build organizational resilience and help create long-term value in today’s challenging times.”
Rebuilding business resilience needs both pandemic and climate risk considerations
Apart from its impact on global communities and economies, the COVID-19 pandemic has also increased the vulnerabilities of markets, particularly those experiencing the severe impact of climate change, from more frequent extreme weather patterns, prolonged water crises to rising global temperatures. In fact, just before the COVID-19 outbreak, the World Economic Forum’s Global Risks Report 2020 highlighted that the top five global risks are climate-related and most regional markets, including Malaysia, have not been spared climate-related disasters, such as floods, droughts and rising sea levels.
Arina says, “With the rampant occurrence of climate change disasters and rising global temperature, inaction is no longer an option. Companies need to consider the broader value chain resilience and build preparedness in facing systemic shocks from external factors such as the pandemic and climate change.”
“Mapping out potential future climate scenarios and their implications on your company's risk management and strategy will be critical. Developing climate risks reporting can further steer strategic thinking towards the design of a “green” roadmap to build enterprise resilience,” she adds.
Climate change acknowledged but not addressed
It is encouraging to note that over three-fifths of the 100 PLCs surveyed reported their commitment to the United Nation’s Sustainable Development Goals (SDG) on Climate action, SDG 13, which recommends that corporates step up disclosures on climate-related risks in governance, strategy and risk management. Nevertheless, the survey findings reveal a lack of meaningful disclosure on climate risk exposures, particularly at sector level.
The CRDB identifies four action points that are pivotal to the management of climate-related risks but are generally less addressed among Malaysia’s PLCs:
- Prioritize the impact of climate risk to business resilience: With climate change a material issue in global sustainability reports, the Enterprise Risk Management (ERM) agenda of Boards needs to prioritize the impact of climate risk to business resilience and long-term sustainability. The assessment of climate risks and opportunities can strengthen current and future business strategies and build business resilience.
- Step up ERM to include the likelihood and impact of climate risk: ERM of companies can evolve to a more structured process including:
- Ensuring climate-related risk is evaluated according to ERM considerations, specifically on its likelihood and impact
- Conducting periodic assessments of emerging climate-related risks and opportunities in the near, medium and longer-term future
- Integrate scenario analysis into ERM processes: Companies should integrate scenario analysis into ERM processes to strengthen business strategies. ERM assessments can consider the transition to a lower-carbon economy consistent with a 2°C or lower scenario and, where relevant, scenarios consistent with increased physical climate-related risks.
- Set clear climate-related metrics and targets: Companies can set clear climate-related metrics and targets to improve the quality of disclosures. Stronger stakeholder engagement across the value chain and more collaborative enterprise-wide efforts can spur the innovation of solutions in mitigating and addressing emerging issues on climate risks.
The time for action is now
Mitigating the impact of climate change is a journey of continuous engagement and collaboration with stakeholders including companies and organizations; key global institutional investors; supply chain buyers and suppliers; regulators; and internal stakeholders including Board of Directors and management team.
When reviewing target investee companies, global institutional investors are now factoring in ESG goals and key risk factors, including the financial impact of systemic shocks, reputational concerns, personal liabilities, long-term business growth potential and value chain resilience.
“Embedding comprehensive and robust enterprise risk management within business operations, including adequate climate risk disclosures, is key towards building business resilience. Delaying climate risk assessments and mitigation actions may increase the risk of short-term reputation damage and the loss of value should an unanticipated climate-induced crisis happen,” Arina concludes.
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About the EY Climate Risk Disclosure Barometer 2020 Malaysia
This report aims to provide a snapshot of the climate risk disclosures of the top 100 PLCs in Malaysia, relative to the global TCFD recommendations.
The analyses on the reporting disclosures of the PLCs and their sustainability practices were extracted from the respective PLCs’ FY2019 to FY2020 company annual and sustainability reports.
The climate risk disclosures of the PLCs were benchmarked against the global TCFD recommendations, providing a comparative assessment of the current coverage and quality of reporting.
Analyses were structured around four areas of a company’s operations:
- Risk management
- Metrics and targets
TCFD performance – disclosure results