There are several reasons companies may be reluctant to reference climate-related matters in their financial statements. First, finance teams may not have the knowledge to understand where climate risks sit in the context of the statements. Second, there is a mismatch in time horizons since financial statements refer to a comparatively short time horizon while climate risk is relevant to a much longer timeframe. Finally, the uncertainty and variability involved with climate scenarios present challenges when it comes to including these scenarios in financial models. Regardless, disclosures offer a critical step forward, notes Dr. Matthew Bell, EY Global Climate Change and Sustainability Services Leader. “Boards and senior management teams should be using their disclosures to inform their stakeholders, particularly their investors, about how they are understanding and managing their risks in practice,” he explains.
How reporting can help accelerate decarbonization
Reporting is an important aid to the decarbonization process because it enables companies to be held accountable — by themselves and others. Nevertheless, it cannot bring about decarbonization all on its own. Decarbonization ultimately depends on companies taking concrete, real-world actions, which include:
- Setting meaningful targets and tracking progress against them
- Reassessing strategy on a regular basis, using scenario analysis to stress-test assumptions
- Collaborating with partners to achieve ambitious decarbonization targets
- Exploring opportunities to transform business portfolios while reducing emissions
In addition, there are three specific ways in which companies can use their corporate reporting to support their decarbonization strategies:
- Prioritize materiality: Rather than trying to focus on every standard and metric, concentrate on telling a sharp, integrated story about the financial risks and opportunities that climate change presents to the business.
- Benchmark disclosures against peers: Study the disclosures of customers, competitors and suppliers to understand how they are responding to the opportunities and risks presented by climate change.
- Prepare for the implementation of the ISSB’s new standards: Ensure that the company has the appropriate processes and governance to respond to the higher levels of scrutiny that will accompany international adoption of the ISSB’s global baseline of sustainability disclosures.
Decarbonization efforts need to gain traction
Today, companies’ climate disclosures are still not as comprehensive as investors, regulators and other stakeholders would like them to be. Neither do they appear to be accelerating the decarbonization process. In fact, global energy-related carbon dioxide emissions rose by 6% in 2021 to 36.3 billion tonnes, their highest-ever level, according to the International Energy Agency.1
If companies are to meet their ambitious net-zero targets, they need to close the major disconnect between the disclosures they are making under the TCFD framework and their own transformation journeys. Climate risk disclosure should not be a box-ticking exercise, but a robust basis for corporate transformation.
Companies’ climate disclosures under the TCFD still do not cover all the information investors, regulators and other stakeholders would like — and they’re not at a high enough level of quality. Additionally, they do not appear to be accelerating the decarbonization process.
If organizations want to meet their net zero targets, they need to address the major disconnect between the disclosures they are making, and their decarbonization transformation.