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We’re finally getting alignment in climate reporting but there’s a missing piece of the puzzle
News
As we all know, the extreme threat of climate change looms ever larger over society and our planet. Despite growing awareness and ambitious targets being outlined by governments, corporates and the finance sector, and extensive collaboration on the issue, action at the pace and scale needed to limit warming to reasonable thresholds is still lacking.
As we all know, the extreme threat of climate change looms ever larger over society and our planet. Despite growing awareness and ambitious targets being outlined by governments, corporates and the finance sector, and extensive collaboration on the issue, action at the pace and scale needed to limit warming to reasonable thresholds is still lacking.
As stated in the Intergovernmental Panel on Climate Change (IPCC)[1] report Climate Change 2022: Mitigation of climate change[2], released earlier this week, immediate and deep emissions reductions are needed across all sectors. In the scenarios assessed by the IPCC, limiting warming to around 1.5°C (2.7°F) requires global greenhouse gas emissions to peak before 2025 at the latest, and be reduced by 43% by 2030; at the same time, methane would also need to be reduced by about a third. Net zero carbon dioxide emissions would need to be achieved globally in the early 2050s.
On the adaptation side, IPCC’s findings from February 2022 set out that “ambitious, accelerated action is required to adapt to climate change…so far, progress on adaptation is uneven and there are increasing gaps between action taken and what is needed to deal with the increasing risks”.
Transparency regarding action (or lack thereof) is key to informing progress, policy and capital allocation, and can support governments, companies, civil society, and investors to hold each other accountable for performance. It has therefore been an encouraging development to see international alignment appear in climate reporting, with the Task Force on Climate-Related Financial Disclosures (TCFD) emerging as the leading framework for comprehensive disclosure on the management of climate related risks and opportunities.
Why is the TCFD important?
Governments around the world are starting to mandate climate-related financial disclosure in line with the TCFD recommendations. In the UK, listed companies, large private companies, and LLPs (amounting to around 1,300 businesses in total) will be required to report against the 11 disclosure recommendations of the TCFD from 6 April 2022. This mandate will incrementally expand until most large companies and organisations are required to disclose by 2025.
Similarly, the European Union (as well as individual member states), Malaysia, Norway, South Korea, Brazil, Hong Kong, Japan, New Zealand, Singapore, Switzerland and Australia have also announced new policies, partnerships or other formal support for the TCFD. Canada recently announced that it is working on regulations to mandate reporting in line with the TCFD framework and the U.S. Securities and Exchange Commission has proposed climate disclosure rules putting U.S. capital market requirements in line with the TCFD, with first reports due as early as 2024. Several international initiatives, such as the G7 and G20, support incorporating the TCFD recommendations into climate-related reporting standards. It is safe to assume that the trend in mandatory climate disclosure will continue.
The benefits to the financial markets of better disclosure are numerous, and it is no wonder that the TCFD is seeing significant uptake from companies across the world (70% increase from 2020 to 2021), as well as growing demand from investors. Companies can gain easier access to capital by proving their climate-related risks are appropriately assessed and managed or that their products and services align with, or stand to benefit in, a low-carbon economy, while enjoying an improved reputation with customers, employees, and wider stakeholders. Meanwhile, investors can more effectively assess climate-related risks to a company, its suppliers and competitors; make better informed decisions on where and when to allocate capital, and better evaluate risks and exposures across investment portfolios over the short, medium and long term. The IPCC report released this week held that while financial flows are a factor of three to six times lower than levels needed by 2030 to limit warming to below 2°C (3.6°F), there is sufficient global capital and liquidity to close investment gaps. Climate disclosure is a key factor in directing those investment flows.
Similarly, the European Union (as well as individual member states), Malaysia, Norway, South Korea, Brazil, Hong Kong, Japan, New Zealand, Singapore, Switzerland and Australia have also announced new policies, partnerships or other formal support for the TCFD. Canada recently announced that it is working on regulations to mandate reporting in line with the TCFD framework and the U.S. Securities and Exchange Commission has proposed climate disclosure rules putting U.S. capital market requirements in line with the TCFD, with first reports due as early as 2024. Several international initiatives, such as the G7 and G20, support incorporating the TCFD recommendations into climate-related reporting standards. It is safe to assume that the trend in mandatory climate disclosure will continue.
The benefits to the financial markets of better disclosure are numerous, and it is no wonder that the TCFD is seeing significant uptake from companies across the world (70% increase from 2020 to 2021), as well as growing demand from investors. Companies can gain easier access to capital by proving their climate-related risks are appropriately assessed and managed or that their products and services align with, or stand to benefit in, a low-carbon economy, while enjoying an improved reputation with customers, employees, and wider stakeholders. Meanwhile, investors can more effectively assess climate-related risks to a company, its suppliers and competitors; make better informed decisions on where and when to allocate capital, and better evaluate risks and exposures across investment portfolios over the short, medium and long term. The IPCC report released this week held that while financial flows are a factor of three to six times lower than levels needed by 2030 to limit warming to below 2°C (3.6°F), there is sufficient global capital and liquidity to close investment gaps. Climate disclosure is a key factor in directing those investment flows.
Taking climate reporting further
However, there is still a critical piece missing – detailed, credible climate transition plans – and this is where businesses now need to focus and really step up.
A recent report by CDP (formerly the Carbon Disclosure Project), published in March, revealed that just a third of the 13,000+ companies that disclosed through CDP in 2021 have low-carbon transition plans. This is clearly an issue since, as the report states, “transition plans are a fundamental part of what is needed from corporate governance to decarbonize the economy and allow investors and other stakeholders to assess a company’s progress in reaching ambitious climate goals”.
Similarly, despite a rise in net-zero commitments, the inaugural 2020 CA100+ Net-Zero Company Benchmark revealed limited progress on climate transition.
The gap is also evident when it comes to assessing the social elements of companies’ transition to a low-carbon future, with the World Benchmarking Alliance’s (WBA) Just Transition Assessment finding that only 5% scored above 50% on their current performance across WBA’s six just transition indicators.
It’s crucial that companies take clear and measurable action on their climate commitments by developing robust low-carbon transition plans that bear scrutiny and meet stakeholder expectations, whether these be consumers, governments, communities or investors. In the UK, these will be mandatory from 2023[3]. The requirements apply to UK financial institutions and listed companies, who will need to set out in detail how they plan to adapt and decarbonise in line with the UK’s 2050 net zero target.
A recent report by CDP (formerly the Carbon Disclosure Project), published in March, revealed that just a third of the 13,000+ companies that disclosed through CDP in 2021 have low-carbon transition plans. This is clearly an issue since, as the report states, “transition plans are a fundamental part of what is needed from corporate governance to decarbonize the economy and allow investors and other stakeholders to assess a company’s progress in reaching ambitious climate goals”.
Similarly, despite a rise in net-zero commitments, the inaugural 2020 CA100+ Net-Zero Company Benchmark revealed limited progress on climate transition.
The gap is also evident when it comes to assessing the social elements of companies’ transition to a low-carbon future, with the World Benchmarking Alliance’s (WBA) Just Transition Assessment finding that only 5% scored above 50% on their current performance across WBA’s six just transition indicators.
It’s crucial that companies take clear and measurable action on their climate commitments by developing robust low-carbon transition plans that bear scrutiny and meet stakeholder expectations, whether these be consumers, governments, communities or investors. In the UK, these will be mandatory from 2023[3]. The requirements apply to UK financial institutions and listed companies, who will need to set out in detail how they plan to adapt and decarbonise in line with the UK’s 2050 net zero target.
What can companies do, today?
There is certainly a lot of talk from companies about climate commitments, and now we need the action to match. There are key steps that organisations need to take to develop and enhance their climate disclosures to align to the TCFD recommendations and develop accompanying transition plans. At GHD we have extensive experience in supporting organisations through the following:
- TCFD readiness review (gap assessment) and disclosure roadmap
- Data sourcing and analysis to fully assess the threats of a changing climate to a business’s operations and the opportunities associated with clear mitigation and adaptation measures
- Scenario analysis and impact quantification to assess business model resilience
- Data-driven and audit-ready GHG emissions calculations across Scopes 1, 2, and 3
- Climate strategy design to reach Net Zero, target setting and action planning
At last, we are seeing some alignment in climate reporting but so much more needs to be done if we are to achieve our net zero targets. More than ever, companies will be expected to provide net zero transition plans to support their climate pledges, take action, and ensure they remain on track. How these plans are formed, measured, and reported on is a challenge that will require significant thought and expertise but if companies deliver, they – and the rest of the planet – will benefit.
References:
[1] The UN’s body for assessing the science related to climate change which released the reports Impacts, Adaptation and Vulnerability on February 28, 2022 and Mitigation of Climate Change on April 4, 2022.
[2] Climate Change 2022: Mitigation of Climate Change (ipcc.ch)
[3] Fact Sheet: Net Zero-aligned Financial Centre - GOV.UK (www.gov.uk)
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About GHD
GHD is a leading professional services company operating in the global markets of water, energy and resources, environment, property and buildings, and transportation. Committed to a vision to make water, energy, and communities sustainable for generations to come, GHD delivers advisory, digital, engineering, architecture, environmental and construction solutions to public and private sector clients. Established in 1928 and privately owned by its people, GHD’s network of 12,000+ professionals is connected across 160 offices located on five continents.