A giant gap persists in the way companies around the world identify climate-related risks and opportunities, and how they are actually preparing to tackle them.
This is the core finding of a report published today by CDP and the Climate Disclosure Standards Board (CDSB). The analysis looked at how companies are doing in the four areas of disclosure identified by the Task Force on Climate-related Financial Disclosures (TCFD): governance, strategy, risk management, and metrics and targets.
The task force, chaired by Michael Bloomberg, was set up by the Financial Stability Board in 2015 to develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.
Although most companies that follow the task force’s disclosures currently report board oversight of climate-related matters, only 1 in 10 currently provide incentives for their board members to manage climate-related risks and opportunities, the new analysis found.
Called “Ready or Not: Are Companies Prepared for the TCFD Recommendations?” the report analyzes disclosures from 1,681 companies across 14 countries and 11 sectors. We asked Simon Messenger, CDSB managing director, to tell us what it means.
How did you analyze the disclosures?
We mapped information reported through the CDP disclosure system against the TCFD recommendations, namely governance, strategy, risk management, and metrics and targets.
The granularity of CDP disclosures allowed us to go into detail relating to each of these topics and get a more complete picture of the state of play. These results were then compared across sectors and countries in order to provide an indication of trends in the market.
How big is the gap between companies identifying and owning climate-related risks and opportunities, and acting strategically to tackle them?
These are stages of evolution through which each company goes through. Although most businesses go through the process of identifying climate-related risks and opportunities, they may not immediately understand the implications of these, how they impact their business performance and value creation, and therefore some risks remain unmanaged and opportunities untapped.
An example we found is that a very small number of companies are investing R&D around low-carbon offerings.
What are the reasons for this gap?
There can be many reasons, but it is often that these risks and opportunities are not well understood. The connection between climate change and its potential implications on a business are not always seen by management and, as a result, they are often not deemed as material.
We are hopeful that the direction toward disclosures that focus on the impact of climate change on the business as a result of the TCFD recommendations will put businesses in the right direction.
What can corporate leaders do?
It is important to ask yourself “So what?” When you look at the data your organization has collected, we often see very little about the implications of this information. Once these implications are clear, corporate leaders focus on managing these risks and understanding how the opportunities can be integrated into the business model of the organization.
In the report, telecom is shown leading the sectors several times. What can you share about this?
Telecommunications companies have really embraced the opportunities associated with climate change given that their services can reduce emissions from travel and their data centers can benefit from alternative energy sources. The business opportunities of being part of the solution to creating a low-carbon economy are clear to them and they are working hard on making the most of this.
The new findings overlap with this recent Ceres report. Is there a trend here?
Absolutely. Both reports highlight the importance of top-level buy in to steer the organization in the right direction and the gap between identifying issues and acting on them.
The solution is clear: Make this part of your core enterprise risk management process, report robust and meaningful data, and ensure that your board is in a position to act on this information. But most important of all is to be clear on the implications of the risks you face, as well as the opportunities that are ahead. Once you are clear about that, it will be obvious that you have to act.
Given what you’re seeing, how likely are we to see companies making substantial changes in the future?
The future remains to be seen but, given what we have seen in the past six to 12 months, we are hopeful. Companies have publicly announced plans to implement the TCFD recommendations and investors are more vocal than ever before about the need for more robust climate change-related information. The shift in perspective from simple data to describing impacts is very promising. This not only helps management make better informed decisions, but it also makes a clear case for investment in sustainable business models.
We’ve seen promising signs, but we are now entering a crucial time where the rubber needs to hit the road. We don’t expect things to change overnight, but as long as enough businesses act, the rest of the market will follow suit soon after.
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