Businesses fall short on climate strategy and action, despite advances in reporting

• Latest EY Global Climate Risk Barometer shows incremental developments in the quality of climate reporting, but rate of improvement is not enough to support climate commitments
• Majority (SEA 89%, global 67%) of surveyed companies do not reference climate-related matters in their financial statements
• About half of surveyed companies (SEA 56%, global 47%) fail to disclose any form of transition plan alongside climate commitments

The 2023 EY Global Climate Risk Barometer suggests a deep disconnect between companies’ climate and corporate strategy. Despite agreeing to climate commitments, about half (Southeast Asia (SEA) 56%, global 47%) of those surveyed do not disclose a transition plan to back these. The majority of (SEA 89%, global 67%) of respondents also do not reference climate-related matters in their financial statements. Of those that do, most (SEA 64%, global 74%) do not include the quantitative impacts of climate risk in their disclosures, implying that climate change is not being considered in the same way as other material impacts, and is reflective of a broader trend for climate strategy to remain separate from corporate reporting.

Despite improvement in the coverage of (+6% year-on-year (YoY)) and quality of disclosures (+6% YoY) globally, notably in the developing economies, the pace of corporate change remains too slow as we reach a point of no return where improvements in disclosures are not enough, and transformative corporate action is required at scale.

The report, now in its fifth year, is an established benchmark that scores the progress being made in both coverage and quality of climate-related disclosures. It examines more than 1,500 businesses in 51 countries, including 133 companies in SEA, covering Indonesia, Malaysia, the Philippines and Singapore, to assess performance disclosure against standards set by the Task Force on Climate-Related Financial Disclosure (TCFD). The Barometer measures companies on the number of recommended disclosures that they make (coverage) and the extent and detail of each disclosure (quality).

According to the Barometer, coverage disclosures continue to move in the right direction, increasing from 84% in 2022 to 90% globally in 2023. Coverage disclosures in SEA markets remained the same at 84% for 2022 and 2023.

However, the quality in climate disclosures remains low at 50% with incremental improvement (+6% YoY) driven only by the need to prepare for increasing requirements for the new International Sustainability Standards Board (ISSB) regulation. In SEA, the quality in climate disclosures is 35% (+9% YoY). 

As well, the Barometer revealed a continued lack of granularity in reporting and the effectiveness of regulation surrounding them. Top markets for climate-related disclosure quality included the UK (66%), Germany (62%), France (59%), Spain (59%) and the US (52%). However, India (36%), China, and the Philippines (both 30%), and Indonesia (22%) were cited as needing marked improvement. Other markets covered in the study fared better in the quality of disclosure, with Malaysia scoring 43% and Singapore at 41%.

Praveen Tekchandani, Singapore Climate Change and Sustainability Services Leader and Partner, Assurance at Ernst & Young LLP, says: 

“Countries with rigorous disclosure regulation and an engaged investor or policymaker community continue to move forward, drawing on recent TCFD disclosures and readying themselves for the new ISSB requirements. In Southeast Asia, while each country is adopting the standards at their own pace, progressive regulators such as those in Singapore and Malaysia have started on the journey, resulting in better scores in the quality of disclosure. Importantly, their experience offers valuable lessons for other countries in the region.

“For companies, amid the fight against climate change and the emphasis on decarbonization, prioritizing climate-related disclosures provides them the opportunity to leverage data to transform their business and operations for a low-carbon future.”

This year, the report has gone deeper to explore three new areas that will dictate the reporting landscape over the next few years: the level to which climate-related risks and opportunities are reflected in companies’ financial statements, which is an indicator of a company’s understanding of climate change risks and opportunities, plus its willingness to disclose that understanding; transition planning, to assess if and how companies are moving from commitment to corporate action; and readiness for the additional insights in relation to readiness or adoption of the draft ISSB S2 standards.

Corporate performance

When looking at the relationship with corporate performance, only one in three companies surveyed disclose quantitative or qualitative aspects of climate-related impact in their financial statements, suggesting that climate risk and impact is not being considered equally within financial performance. Furthermore, a significant proportion of companies (SEA 71%, global 42%) surveyed fail to perform scenario analysis in the context of the company’s value chain and wider market dynamics. And, signifying that climate change is still not being viewed in the context of business growth, most companies remain less inclined to disclose their strategies on climate-related opportunities (SEA 40%, global 68%) than those on risks (SEA 52%, global 77%).                                             

Transition planning

Work needs to be done on transition planning. About half (SEA 56%, global 47%) of companies surveyed do not disclose how they plan to pivot their business model and operations to align with the latest climate recommendations. Of those that do disclose plans (SEA 44%, global 53%), the level of detail remains limited. Sectors exposed to the greatest climate risk unsurprisingly have the most detailed plans, and these include energy (SEA 78%, global 60%), mining (SEA 29%, global 60%), transport (SEA 42%, global 58%), and telecommunications and technology (SEA 43%, global 57%). Agriculture, however, falls behind, with less than half (SEA 47%, global 43%) of those surveyed in that sector disclosing any form of transition plan.

Compliance readiness

The report reveals that the companies that have understood the links between climate risk and business growth strategy are well-positioned to address the new climate-related disclosure requirements such as the International Financial Reporting Standards (IFRS) S2, but those who continue to simply take a compliance-driven approach are more likely to struggle to meet the new climate-related reporting requirements.

The path forward to action

The report cites three critical actions that companies should consider taking to support the global climate agenda:

• Mindset shift from burden to action: In the best performing companies, disclosure data is used to drive action.
• Data-driven carbon agenda: Data should not be siloed but should be connected and integrated into risk management and used to drive carbon reduction.
• Boardroom elevation: Climate data should be used at a boardroom level to inform corporate strategy, where leaders take a complete approach to climate impact across the entire organization.

Nhan Quang, Partner, Climate Change and Sustainability Services, Ernst & Young LLP, says:

“The report highlights a concerning disconnect between the climate ambitions and the corporate actions to achieve them. This is particularly worrying for Southeast Asia. As one of the regions most vulnerable to climate change risks, it faces the threat of rising sea levels, heat waves, floods, droughts and increasingly intense and unpredictable weather events. There is also increasing pressure from Southeast Asia’s major trade partners for a greener value chain. Hence, beyond disclosure obligations, there is a real need for corporates to start their climate risk assessment early, for both physical and transitional risks. This allows them to be better prepared for business disruptions that will come with climate change and the shift to low-carbon economy, thereby enhancing their overall resilience.”

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About the EY 2023 Climate Risk Barometer

The Barometer provides an annual overview of the alignment of organizations’ climate-related risk disclosures, with 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 an investors), with an understanding of the current state of global climate risk reporting. The first edition of the Barometer was issued in December 2018.

The 2023 Barometer analyzes the extent to which companies have built on the TCFD framework to prepare for the introduction of new regulations surrounding the disclosure of climate-related risks and opportunities through their reporting processes. It draws on public disclosures produced during the 2022 calendar year by companies in both the financial and nonfinancial sectors, including companies that are at high risk of climate-related impact. These disclosures were typically made in annual sustainability reports and CDP reports.

The disclosures of 1,536 companies (the largest by market capitalization) across 13 exposed sectors in 51 jurisdictions were included in the assessment, broadening the size and geographical scope from 2022. In addition, the scoring matrix for the Barometer has been evolved and refined since last year to become even more detailed and robust. Companies were scored through a multi-tiered system that included both the coverage and quality of the TCFD recommendations.

This year’s Barometer builds on previous research and incorporates several new elements, particularly those concerned with organizations’ readiness for the introduction of ISSB S2. In particular, it captures: companies’ readiness to comply with IFRS S2 disclosure requirements; disclosure around transition plans; disclosure of financial impact due to climate change in financial statements/reports. This was achieved by incorporating additional questions emerging out of additional disclosure requirements under ISSB, as well as enhancing existing ones to focus on incremental themes. These aspects were examined in the context of: increasing regulatory pressure and the emergence of ISSB; increasing concerns from various stakeholders to evaluate how tangible the climate targets disclosed by the companies are and whether they are actually moving toward net-zero; the increasing requirement to understand climate impact on a company’s operations.