Climate Reporting: Lost in the Right Direction?
An acute increase of carbon dioxide content in the atmosphere over the past 100–150 years (that in turn leads to climate change) is the fundamental challenge of our time. Other problems humanity faces today do not stand close even merely to the one of CO2, which is more difficult for us to notice, since gas cannot be touched or seen.
The main reason for the critical growth of greenhouse gases is the way human life, culture, and economy are organized. Consumption and overconsumption of resources and products and services are the cause of the unthinkable release of carbon from the bowels of the earth into its atmosphere.
Climate change is the fundamental challenge of our times.
Why is climate change so scary and urgent? Well, honestly, because everything else is ridiculously irrelevant if there is no place and conditions for us to do whatever we were doing before.
People all over the globe already feel what is called ‘climate despair’, suffering from mental illnesses and grieving about their future, understanding it may not come: young people don’t want to start a family and have kids, they give up on their dreams such as moving somewhere — as they learn these places will (most probably) disappear soon.
At this point, what must we do?
Those whose hands concentrate most impact and power, those whose daily financial decisions make a change and really matter need to effectively act together for the climate. By ’those’ I mean corporations, business influencers, and governments.
In October 2018, the Intergovernmental Panel on Climate Change (IPCC) released a special report on the impacts of global warning of 1.5˚C and the emission pathways to achieve this goal. The results of the report are expected to put more pressure on policymakers across jurisdictions for timely changes to carbon and energy policies, and greater needs to investors to assess the impact on their investment portfolios. Thus, there is increased expectation from businesses to making better disclosures on their resilience to climate transition risks.
Businesses do indeed join various disclosure initiatives. But does it really help the climate? Or does the pursuit of beautifully aligned data rather distract companies from taking real actions?
Climate-related data disclosure standards are the focal theme of this week’s article.
How not to get confused in the variety of different frameworks and standards, and whether there is any chance they unite one day? What are the pros and cons of each type of reporting? What do stakeholders and especially investors expect from companies regarding climate reporting? And, finally, where a company should start if it reports for the first time?
The State of Climate Reporting
There is a myriad of reporting frameworks: CDP, the Climate Disclosure Standards Board (CDSB), the Financial Accounting Standards Board (FSB), the Global Reporting Initiative (GRI), the International Accounting Standards Board, the International Organisation for Standardisation (ISO), the Sustainability Accounting Standards Board (SASB).
Some of them, namely the ISO, SASB and GRI, were covered in the previous article on Sustainability Reporting on this blog. This week I am inviting you to discover 4 Climate Reporting Frameworks (3 for companies and 1 for cities and local governments), so let’s begin.
#1 CDP (formerly Carbon Disclosure Project)
As a non-governmental organization based in the UK, CDP helps companies and cities to disclose the corporate environmental impact since 2002. At the time CDP had just 35 investors signing its request for climate information & 245 companies responding. Today, nearly a fifth of global greenhouse gas emissions are reported through CDP.
Its goal is to make environmental reporting and risk management a business norm, drive disclosure, insight, and action towards a sustainable economy.
CDP works with over 6000 corporations, as well as over 550 cities and 100 states and regions to help them ensure that effective carbon emissions reductions strategy is made integral to their operations.
Even though full former name of CDP — Carbon Disclosure Project — contains ‘Carbon’ in its name, which can mislead you into thinking that CDP is only about climate change factors, in reality, CDP channels information and progress through four individual programs:
- Climate Change;
- Water;
- Supply Chain;
- Forests.
Its Climate Change program aims to reduce companies’ greenhouse gas emissions and mitigate climate change risk. CDP asks disclosing parties to fill in the questionnaire, aligned with the requirements of the Task Force on Climate-related Financial Disclosure (TCFD) and recognizes companies with high-quality disclosure in its annual scoring process by listing them in an A-list.
Scores are calculated according to a standardized methodology that measures whether and how well, a company responds to each question. A company goes through four main steps, starting with disclosure of their current position, moving to awareness which looks at whether a company is conscious of its environmental impact, to management, and finally leadership.
A high CDP score is usually indicative of a company’s high environmental awareness, advanced sustainability governance and leadership to address climate change.
Some of the corporate participants include Apple Inc., Siemens, PepsiCo, Hewlett Packard, Dell, Tesco, Procter & Gamble, and Unilever.
In 2018, over 6,000 companies reported to CDP’s questionnaire, measuring their climate-related risks and opportunities, as well as the associated financial implications. The results of blended data from all the disclosers can be found here.
#2 Task Force on Climate-related Financial Disclosures
In 2015, at the request of the G20 Finance Ministers and Central Bank Governors, the Financial Stability Board (FSB) and its chair Mark Carney established the industry-led Task Force on Climate-related Financial Disclosures (TCFD).
Unlike other recent reporting developments, TCFD isn’t about the company’s impact on the environment, it is about the environment’s impact on the company. These disclosures are targeted at mainstream investors and are intended to help them assess whether climate risk is appropriately priced into their valuation of the company.
The recommendations of the Financial Stability Board’s (FSB) Task Force on Climate-Related Financial Disclosures (TCFD), which focus on how companies should report climate-related governance, strategy and risk management, have thrust climate risk into the minds of investors worldwide.
A total of 785 organizations responsible for assets of $118tn are signed up as supporters of the TCFD, which, to quote chairman Michael Bloomberg, believes “in the power of transparency to spur action on climate change through market forces”.
The Task Force developed voluntary (although certain elements have been legislated in France), consistent climate-related financial disclosures intended for all organizations from both financial and non-financial sectors.
The disclosures are useful to investors, lenders, and insurance underwriters in understanding material risks.
The Task Force is global, its members were selected by the Financial Stability Board (FSB) and come from various organizations, including large banks, insurance companies, asset managers, pension funds, large non-financial companies, accounting and consulting firms, and credit rating agencies.
The TFCD recommendations are structured around four thematic areas that represent core elements of how companies operate:
The four overarching recommendations are supported by 11 recommended disclosures that build out the framework with information that will help investors and others understand how reporting companies assess climate-related risks and opportunities.
TCFD is also used as an opportunity to demonstrate competitive advantage, by explaining how a company is proactively pursuing the opportunities of a transition to a low-carbon economy, and capturing market share through a first-mover advantage.
The most recent findings of the TCFD can be found in their latest report.
#3 Climate Disclosure Standards Board (CDSB)
The Climate Disclosure Standards Board (CDSB) is an international consortium of business and environmental NGOs, that is committed to advancing and aligning the global mainstream corporate reporting model to equate natural capital with financial capital.
This happens by offering companies a framework for voluntary reporting environmental information with the same rigor as financial information. CDSB has its own Climate Change Reporting Framework.
In turn, this helps them to provide investors with decision-useful environmental information via the mainstream corporate report, enhancing the efficient allocation of capital. Regulators also benefit from compliance-ready materials. CDP (formerly the Carbon Disclosure Project) provides the Secretariat for CDSB. This is just to emphasize once again how interconnected it all is in the sphere of climate reporting (and not only).
#4 Global Covenant of Mayors for Climate and Energy
Not just companies report on their climate achievements. Cities and local governments are not lagging behind.
The Global Covenant of Mayors for Climate & Energy (GCoM) is the world’s largest alliance of cities and local governments with a shared long-term vision of promoting and supporting voluntary action to combat climate change and move to a low emission, climate-resilient future.
This coalition gathers almost 10 thousand (9664 as of the date of publishing of this article, to be precise) cities of all sizes across 6 continents and more than 120 countries, representing almost 10% of the world’s population (that is 326 671 680 inhabitants).
Through the GCoM, cities and local governments are voluntarily committing to fight climate change, mirroring the commitments their national governments have set to ensure the goals of the Paris Agreement are met. It is a commitment to not only take bold local action but to also work side-by-side with peers around the world to share innovative solutions that enable mayors to do more, faster.
It has its own Framework for Climate Reporting, that is expected to help create more consistent and cross-comparable data, focuses on the following topics:
- Greenhouse gas emissions inventory;
- Target setting;
- Risk and vulnerability assessment;
- Climate action and energy access planning.
The Covenant’s framework is meant to make it easier to finance city-level climate projects, which sometimes can be snared in national approval processes or derailed by unfavorable risk assessments when there is little data available on comparable efforts.
If all Global Covenant cities commit to and achieve targets similar to those already established, by 2050, the cumulative emissions avoided could reach more than 46 billion tons of carbon dioxide equivalent, according to analysis by WRI, roughly equal to the entire world’s emissions in 2010, according to Schuyler Null’s article ‘Measuring Climate Success with New Common Reporting Framework for Cities’.
But wait, how do I know I am using the correct/ acceptable by stakeholders format, reporting framework and so on?
Right! No wonder organizations are lost and confused, and what’s worse — distracted from delivering the improvements, when reporting frameworks differ greatly by scope, form, depth of requested data, etc.
This is why The Better Alignment Project was created in late 2018 — to open a dialogue between CDP, the Climate Disclosure Standards Board, the Financial Accounting Standards Board, the Global Reporting Initiative, the International Accounting Standards Board, the International Organisation for Standardisation, the Sustainability Accounting Standards Board. All this is currently convened by the International Integrated Reporting Council.
The aim of the two-year project is to make it easier for companies to prepare effective and coherent disclosures that meet the information needs of capital markets and society.
The recommendations of the Task Force on Climate-Related Financial Disclosures and its focus on mainstreaming climate risk planning and reporting in financial disclosures seem to be a driver behind the project. SASB, GRI, and CDP map their frameworks against the TCFD recommendations, to better align their metrics.
The project also considers how frameworks such as the IIRC’s and CDSB’s can be used to promote further integration between non-financial and financial reporting.
Here’s a useful tool to understand the links between the reporting initiatives — Corporate Reporting Dialogue. It was created back in 2016 with a mission “to respond to market calls for greater coherence, consistency, and comparability between corporate reporting frameworks, standards, and related requirements.”
The International Integrated Reporting Council (IIRC) is the convener and supports work to align the various frameworks and standards through the International <IR> Framework, or Integrated Report.
How are we doing so far?
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 of the globally recognized TFCD.
According to the EY Global Climate Risk Disclosure Barometer report, which draws on disclosures of over 500 companies during the 2017–18 reporting period, across 11 highly impacted sectors in 18 countries, disclosures were relatively poor, with the average score being 31%.
Almost all sectors of the economy face major disruption from climate transition and climate impacts over the coming years. Yet, a majority of companies in key economies are still not engaging seriously with these risks, or positioning themselves to take advantage of potential opportunities.
Across 4 elements TCFD covers — governance, strategy, risk management, and metrics and targets, disclosures relating to ’strategy’ and ‘risk management’ were the least developed. No doubt on this discovery — they require a detailed analysis of how climate change will impact a business and how the business is responding.
The most common disclosures identified were related to the monitoring and management of an entity’s own emissions. Many companies also identified transition risks that either directly impact their sector or the supply chains they rely upon.
Scenario analysis was mentioned in the disclosures of many of the larger global entities. Several organizations also disclosed their support for a 2˚C future but did not state how their business aligned with such an economy.
Now what?
In short, the earlier companies embark on the journey, the better. Assessing climate-related risks and opportunities is surely complex, and requires detailed analysis, but the effort pays off.
Disclosure not only communicates the progress to stakeholders but — importantly — helps the companies themselves identify gaps, and provides with the new inputs into business strategy and planning, enhancing capacity & operations.
It may require several years for an organization to be in a position to generate valuable information for investors and shareholders to help them make informed decisions.
Most important in this journey towards sound climate reporting is, perhaps, de-prioritizing the reporting per se and focusing on actually delivering the improvements that drive change.
As a Company, where do you begin?
Companies that seek to understand their climate risks exposure can ask themselves the following questions:
- What are the biggest emission sources in my value chain?
- What are the incentives, instruments or indicators that can help me align my strategy with the 2°C road map (e.g., internal carbon price on CAPEX and OPEX, and company-specific targets)?
- What are my stakeholders’ expectations in terms of climate footprint and carbon performance (e.g., lead the development of low-carbon products and services, or disclose information required by investors)?
- What type of climate risks is my business exposed to in the long run?
- How will my products and services be affected by carbon policies and targets? What are the right anticipation and adaptation strategies?
- Are the international climate policies and national commitments integrated into my business strategy, supply chain or sourcing strategy
- What is the potential exposure to new regulations (e.g. carbon taxation or carbon pricing)? What assets are at risk (e.g., supply chain, products or activities) and in which geographies?
- Are some of my products or activities at risk regarding the 2°C road map? How can I turn this into a competitive advantage?
Writer Anna Chashchyna
