60%
Surveyed companies that reported on climate-related risks and opportunities in fiscal year 2021, a 19 percentage point increase between 2019 and 2021.
Source: Task Force on Climate-related Financial Disclosures
Standard-setting bodies such as the International Sustainability and Standards Board (ISSB) and the International Organization of Securities Commissions (IOSCO) voiced support for greater disclosure and encouraged global regulators to adhere to established and reliable frameworks for improvement.
Given this momentum, companies can expect other countries and regions to follow and adopt new reporting standards as well. Organizations should monitor proposed changes to standards so they can prepare for what is ahead.
Government regulators have been busy proposing and implementing climate and broader sustainability disclosures in 2022. Consider some of the following developments:
In each of these proposals, there is a mutual acceptance of and alignment to the TCFD’s recommendations on climate-related financial disclosures. Over the past five years, the percentage of companies disclosing the TCFD’s recommendations in financial filings or annual reports has increased each year. In fact, more than 70 percent of companies surveyed by the TCFD for its annual report implemented its recommendations for fiscal year 2021 compared to 45 percent for fiscal year 2017.1
There are other key similarities and priorities that resonate across these proposals, including:
Third-party verification is a discussion topic that regulators see as a solution to verifying reported data and ensuring standards of reporting and data quality are upheld. In the UK for example, in early 2022, the primary financial reporting regulator rejected membership applicants to the UK Stewardship Code based on assessments from the Financial Reporting Council (FRC), a trusted third-party.
Most recently, at the 2022 United Nations Climate Change Conference or COP27, UN Secretary General António Guterres said the global climate community must have “zero tolerance” for greenwashing in the transition to net zero. “Using bogus net-zero targets to enable fossil fuel expansion is reprehensible… The sham must end.”
Regulators and the general public are increasingly focused on non-financial disclosure, including nature capital or the world’s stock of natural assets (i.e., soil, water and all living things).
Supply chain issues are important to companies that either have to or choose to disclose scope 3 emissions to regulators, because these emissions might represent the majority of an organization’s greenhouse gas emissions. Although a company doesn’t have direct control over its scope 3 emissions, it may be able to impact the activities that result in these emissions.₂ For example, Apple took steps recently to call on its global supply chain to address their greenhouse gas emissions and take a comprehensive approach to decarbonization.₃
The FRC emphasized the need for companies to disclose risks and opportunities posed by climate change and the transition to a low carbon economy, saying, “comprehensive, high-quality and consistent climate-related disclosures lead to greater transparency about companies’ challenges, which, in turn, helps investors to make better decisions.”
Planning to mitigate climate risks and realize opportunities will not be easy for companies without a global regulatory framework that puts a price on carbon. For many companies, achieving emissions reduction targets will necessitate the use of carbon credits, which demands greater market stability and upon which global regulators can act accordingly. The SEC’s proposed rules introduce disclosure requirements on the role that carbon credits play in achieving an organization’s climate-related business strategy, and it’s possible other regulators will take similar action.
The proposed regulations represent a milestone in the environmental, social and governance (ESG) movement. Investors and other stakeholders want to know how companies are addressing their climate risks and are increasingly asking for more standard disclosure around emissions reporting. As investors look to disclosures to inform their investment decisions, companies that don’t start preparing now risk potentially shutting themselves off to new forms of capital, falling behind their competitors, alienating stakeholders, exposing themselves to reputational risk and having to scramble to comply when new rules are finalized.
While many proposed rules aren’t yet final, the sooner businesses begin assembling information related to the proposal and ensuring they are prepared, they will be better positioned to comply quickly. We recommend companies incorporate the following questions as they prepare for future regulation:
Who has oversight and responsibility for climate-related risks and opportunities within management? Is this information reported to the board of directors (or a key committee tasked with ownership of this topic)? What governing policies and procedures are in place for oversight and responsibility within management and the board?
Board members are finding themselves in need of more information and education on ESG topics, including climate. Management should consider whether and to what extent to provide the board regular updates on the company’s climate strategy, tailored trends and education. Ensure public disclosure on how the board receives this information.
Identify, quantify and assess the ways climate change will impact your company. Both physical and transition risks must be considered; scenario analysis is the most commonly preferred method to undertaking an assessment.
What climate-related information is currently tracked, measured and monitored or reported? Is such data reviewed by a third-party for verification or assurance?
What climate-related public statements, claims or commitments have been made? Are you tracking information and data across departments? Are you relaying accurate progress to or greenwashing the public?
How do you define materiality for climate-related risk compared to regulators? It might be necessary to integrate climate disclosures and processes with financial reporting disclosure processes.
The impact of proposed regulations will vary depending on a company’s industry, unique environmental footprint and how far along it is in addressing and disclosing emissions.
Emissions financed by banks (considered scope 3) place a more onerous burden on the industry. Financial institutions should build new models to help quantify exposure to physical and transition risk across both investment and lending portfolios. To usher a more rapid transition, companies should enjoin themselves with global or regional coalitions committed to decarbonization efforts such as the Glasgow Financial Alliance for Net Zero. As companies do this, it will improve their disclosures and ultimately enable more informed risk management approaches.
The pressure on energy companies from all stakeholders, including shareholder activists, will likely increase as energy abundance, use and development improves and because the role and impact of energy companies in transitioning to greener energy is significant. Paul O’Keefe, managing director of enterprise clients in Asia-Pacific at Aon, stresses the significance of the move towards a requirement for scope 3 emissions reporting because it brings closer the relationship and influential ties between carbon emissions and supply chains.
“This will cause companies to reach into their value chain to understand the full greenhouse gas impact of their operations. Although not under the company’s control, they will be expected to influence the activities that result in the emissions of its suppliers and consider the broader ESG context of their customer base and utilization of their products, says O’Keefe.
The future of the food, agriculture and beverage (FAB) industry will be influenced and financed by multiple stakeholders, including consumers, regulators, governments and investors. Leaders and innovators in the industry have been proactive around voluntary climate disclosures in line with TCFD recommendations, with a shift in mindset beyond simply profit to a “people-purpose-planet” agenda. Dairy and meat businesses will be particularly challenged navigating the emission disclosures given their volume of methane emissions. While many FAB companies have made progress in identifying physical and transition risk, our clients are also leveraging the power of predictive analytics to better understand, quantify and model this risk, with a view to informing the business strategy on climate and ensuring the issue is core to the enterprise risk framework.
Facing the potential prospect of higher carbon taxation in order to curb climate impact, energy, metals and minerals producers will likely face greater pressure from regulators, investors and consumers to ensure material production is less carbon intensive and more environmentally friendly, reducing climate-related risks. In the future, it’s possible metals and minerals producers could receive tax incentives to pursue greener product output and distribution.
The real estate industry depends on global supply chain materials that are known to have carbon-related risks such as cement, steel and glass. Efforts to reduce carbon output from metals and minerals will likely impact the price of these materials and increase the potential for brown discount in yields versus an opportunity for a green or positively beneficial premium.
Challenges and changes to proposed rules in places like the U.S. and Canada where they haven’t been enacted into law are expected in the near future as public opinion is reviewed and questions are raised. However, the future of regulation on the topic of climate is looking increasingly global and harmonized among countries, governments and regulators.
This is because countries, businesses and people experience weather events and climate-related disasters collectively; it affects mass populations at once, which will always be pushed to the front of the public consciousness. Therefore, it’s sensible to think that tackling a complex global issue such as climate change would benefit from international cooperation and collaboration.
Despite the benefits of global cooperation, political divisions still exist as barriers to progress on climate regulation. For example, developing nations look to rich nations to financially help them reduce carbon emissions, yet rich nations continue to rely on the success of heavy industry, often the same actors noted as carrying out pollution and negative climate impact.
The vision of the 2022 United Nations Climate Change Conference is one resource that countries and companies should look to for advice and recommendations on setting and achieving decisions, pledges and agreements to accelerate climate action through appropriated finance and adaption efforts. The 2022 TCFD Status Report is another valuable resource for companies dedicated to increase their TCFD-aligned reporting and implement recommendations of climate-related reporting requirements and standards based on the history and performance of others working with global regulators.
As countries and governments work in tandem to build a foundation for global ESG reporting standards, a company’s C-suite, risk managers and other climate stakeholders will want to ensure standards are upheld in each country of operation or face greater risk when it comes to investor interest based on compliance and risk history. Companies need to make climate disclosure decisions not only aligned to the basic needs of regulation compliance, but also in their best interest and long-term planning strategy.
1 Task Force on Climate-related Financial Disclosures – 2022 Status Report
2 Scope 3 Inventory Guidance
3 Apple calls on global supply chain to decarbonize by 2030
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Surveyed companies that reported on climate-related risks and opportunities in fiscal year 2021, a 19 percentage point increase between 2019 and 2021.
Source: Task Force on Climate-related Financial Disclosures
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