Emissions data is often voluntarily reported. But many will be impacted by new regulations making carbon disclosure a requirement.
While emissions data has been voluntarily reported by companies striving to stay ahead of the regulatory curve so far, many organisations will be impacted by new regulations making carbon disclosure a requirement.
Here, we give you an overview of the relevance for disclosing on climate-related risk and the latest developments in binding climate reporting and necessary preparatory actions. We also identify the opportunities and possible solutions for you.
Report on Risks and Opportunities
The calls for accelerated and decisive action to reduce greenhouse gas (GHG) emissions and to create a low-carbon, climate-resilient economy are well known. For example, we’re all familiar with the 2015 Paris Agreement on Climate Change, the United Nations’ Sustainable Development Goals and the Special Report of the Intergovernmental Panel on Global Warming of 1.5 ºC (October 2018). All point out that climate change and related weather extremes pose immense risks to nature, our society and our prosperity. The effects are already evident and shape the risk landscape, meaning that companies and financial institutions have a critical role to play in the transition to a low-carbon and climate-resilient economy. To fulfil this role, they should consider two relevant perspectives:
The risk perspective:
- Shows (potential) financial impacts, which can be material as weather-related disasters caused a record in economic damages in the recent past
- Uses scenario analysis for forward-looking assessments of climate-related risk
- Addresses the two major categories for climate-related risks: (1) risks related to the transition to a lower-carbon economy and (2) risks related to the physical impacts of climate change
Efforts to mitigate and adapt to climate change also produce opportunities for organisations, for example, the development of new products and services, access to new markets, and building resilience along the supply chain.
The opportunity perspective:
- Billions of additional annual investments are needed to meet countries’ and companies’ energy and climate targets for 2030
- Even more funds will be needed to achieve climate neutrality by 2050
- Resulting investments represent significant business opportunities
TCFD as Core Guidance
Better disclosure of climate-related information by companies is essential to get access to more favourable funding based on the principle of financial markets’ efficient capital-allocation decisions. The Financial Stability Board (FSB) created the Task Force on Climate-related Financial Disclosures (TCFD) to develop recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing risks related to climate change. The TCFD framework is the most widespread instrument for companies’ climate-related risk management and strategic planning processes. It’s the instrument of choice for regulators and international standard setters who reference its recommendations in developing climate-related reporting requirements and standards – including but not limited to:
- The European Union’s Corporate Sustainability Reporting Directive (CSRD) will likely require most publicly listed companies and large companies meeting two out of three conditions (more than 250 employees, revenues over €40 million, over €20m in assets) in EU markets and non-EU companies (over €150 million revenue) operating in the European Union to disclose their scope 1, 2 and 3 emissions with assurance from third-party auditors. Further, they need to demonstrate how their business model and corporate strategy are compatible with the world’s transition to Net Zero emissions by 2050 and limiting global warming to 1.5°C.
- The United States Securities and Exchange Commission (SEC) and its new rules requiring all public companies registered with the SEC to disclose a complete emissions assessment covering scopes 1, 2 and 3. Companies also need to report the risks posed by climate change on their business.
- UK’s climate-related financial disclosure requirements make it mandatory for more than 1,300 of the UK’s biggest companies to publish information about the impact of climate change on their business in alignment with TCFD recommendations.
- Swiss ordinance on mandatory climate disclosures requires public companies, banks and insurance companies with 500 or more employees and at least CHF 20 million in total assets or more than CHF 40 million in turnover to report publicly on climate issues as recommended by the TCFD.
- IFRS – International Sustainability Standards Board (ISSB) issued its first two IFRS Sustainability Disclosure Standards, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures which also follow the TCFD logic.
Where to Start?
Getting ahead of regulation, companies will need to quickly transition to investor-grade climate reporting, as the regulations are setting a new standard for companies to prepare auditable greenhouse gas emissions reports and proactively manage their risk exposure to climate change. In the not-so-distant future, and in some cases now, companies will be reporting climate and other sustainability information in the same way they do for financial information.
Get things going with a gap analysis to better understand your status-quo. Then define a roadmap for the implementation of missing parts and the integration of climate-related issues into your existing risk management and reporting processes.