The EY Global Climate Risk Barometer indicates some improvement in climate reporting quality, but not enough to meet climate commitments. Despite improvements in reporting, businesses continue to neglect adequate climate strategy and action.
The three focus areas:
This year’s report delves into three new areas that will significantly influence the reporting landscape in the coming years. These include:
i. Corporate performance: Just one out of every three companies surveyed revealed quantitative or qualitative links between climate-related impacts in their financial statements when examining the relationship with corporate performance. This suggests that climate risk and impact are not given equal weight when analyzing financial performance.
Analysis:
• 42% organizations did not carry out scenario analysis when considering the company’s value chain and broader market dynamics
• The majority of businesses are still less likely to disclose their strategies on climate-related opportunities (68%) than those on risks (77%), indicating that climate change is still not seen in the context of business growth
ii. Transition planning: Corporates must work on transition planning, the study reported.
Analysis:
• Almost half (47%) do not disclose how they plan to change their operations and business model to comply with the most recent climate recommendations
• Of those who do reveal plans, 53% provided limited details
• The industries with the most intricate plans are those most vulnerable to climate change. These include energy (60%), mining (60%), transportation (58%), telecommunications, and technology (57%). In contrast, only 43% of respondents in the agriculture sector revealed any kind of transition plan.
iii. Compliance readiness: The study indicates that businesses with a climate risk-related business growth strategy are better equipped to handle new climate-related reporting requirements, such as IFRS S2.
Key highlights of the EY Global Risk Barometer:
The Barometer for this year indicates a significant mismatch between the climate and corporate strategy of organizations. Even though they have agreed to make climate-related commitments:
• Disclosures have risen from 84% in 2022 to 90% in 2023, indicating a positive trend
• The quality of climate disclosures is still low at 50%, and the only factor contributing to the slight improvement (+6% YoY) is the need to get ready for the new International Sustainability Standards Board (ISSB) regulation’s higher requirements
• Almost half (47%) of the respondents do not have a transition plan to support these
• 74% of responding companies do not disclose the quantitative effects of climate risks
• Even though the quality and coverage of disclosures have improved (+6% YoY and +6% YoY, respectively), especially in developing nations, corporate change is still happening too slowly as disclosure improvements have reached a tipping point
• Reporting granularity and the efficacy of regulations pertaining to them remained lacking
• The US (52%), France (59%), Spain (59%), Germany (62%), and the UK (66%) were the top markets for the quality of climate-related disclosure
• Significant need for improvement in Indonesia (22%) and China (30%), as well as in India (36%)
The way ahead:
The report cites three critical actions that companies should consider taking to support the global climate agenda:
• Mindset shift from burden to action: High-performing businesses leverage disclosure as a catalyst for change. They combine strategy, action plan, and rigorous data disclosure to mitigate climate risk effectively.
• Data-driven carbon agenda: Data should be integrated into risk management, promoting carbon reduction, and not stored in silos.
• Boardroom elevation: Boardrooms should utilize climate data to guide corporate strategy, addressing the impact of climate change from all angles within the company.
Leader speak:
Dr. Matthew Bell, EY Global Climate Change and Sustainability Services Leader, said, “This year’s Barometer report shows there are both leaders and laggards when it comes to disclosure, with complexity existing regionally and across sectors. Unsurprisingly, countries with rigorous disclosure regulation and an engaged investor or policymaker community continue to move forward, drawing on the recent TCFD disclosures and readying themselves for the new ISSB requirements. Markets where there is a lack of any mandatory climate disclosure requirements pull the average down, and until this is addressed, scores will remain low.”
He warned that the EY Global Climate Risk Barometer for this year showed a worrying gap between corporate actions to achieve climate goals and stated ambitions.
The transition to a net-zero economy is crucial for meeting climate obligations. Revealing climate risk should be seen as a competitive advantage and a broader commercial strategy, he said.
“This may be a pivotal moment for leaders who should adopt and deliver real change. Business should shift from a commitment mindset to one of action, where their decarbonization strategy is not only embedded, but executed across their operations,” he said.