Impact investors are increasingly asking companies to articulate how climate change stands to affect the health of their bottom lines. While companies have begun responding these calls, results have been mixed, according to global consulting firm EY. Almost two-thirds of companies worldwide publish climate change–related risks, but the quality of the disclosures averages just 31%.
Here is a closer look at investor expectations for corporate climate reporting.
What Is Climate Risk Disclosure?
Since 2000, more than 7,000 corporations have voluntarily reported information on carbon emissions, energy consumption, climate change risks, and carbon mitigation strategies through CDP, formerly known as the Carbon Disclosure Project.
While complimentary of the work that CDP and other sustainability organizations have done, the Financial Stability Board sought an improved climate risk disclosure process for investors and founded the industry-led Task Force on Climate-related Financial Disclosures (TCFD) in 2015. In 2017, the group developed 11 recommendations for climate-related financial disclosures within four thematic areas:
- Governance around climate-related risks and opportunities
- Strategy driven by the actual and potential impacts of such risks and opportunities
- Risk management efforts
- Metrics and targets for assessing and managing climate-related risks and opportunities
In the US, the Securities Exchange Commission (SEC) requires that publicly held companies annually report material risks, including those related to climate change. But a lack of specificity regarding the requirements for disclosing climate risks makes comparisons challenging. To reduce the opacity in the SEC’s measures, a group of US senators introduced the Climate Risk Disclosure Act earlier this year. Still, the TCFD guidelines likely remain the best framework for corporate climate risk disclosure for the near future.
Arming Investors with Climate Risk Data
Greenhouse gas emissions represent one data point on the climate risk disclosure spectrum. So does a value on stranded assets, which are unrecovered energy sources such as untapped oil reserves that will diminish in value in an increasingly low-carbon world.
In the sustainable investing realm, however, a holistic approach to climate reporting may be helpful. EY recommends a wide-lens approach to potential impacts, encompassing:
- Physical damage to land, buildings, stock, or infrastructure from climate-related impacts
- Secondary damage from physical impacts, including resource shortages, supply chain disruption, and political instability or conflict
- Policy-level changes such as carbon pricing, emission caps, or discontinued subsidies
- Liability matters related to insurance claims and legal damages
- Drops in investment and asset values stemming from climate-related issues
- Reputational impacts from contending—or not—with climate-related issues, risks, and liabilities
This type of information best positions impact investors to understand potential risks and opportunities as they make investment decisions and plan shareholder engagement strategies.