Businesses still have a lot to do on climate strategy.
Ireland ranks as one of the top countries out of 51 globally for the quality of climate-related disclosure, according to the 2023 EY Global Climate Risk Barometer.
The report, however, suggests businesses still have a lot to do on climate strategy despite improvement in the coverage of and quality of disclosures.
“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”
Now in its fifth year, the barometer is an established benchmark that scores the progress being made in both coverage and quality of climate-related disclosures. It examines more than 1,500 businesses in 51 countries, including 31 Irish companies, to assess performance disclosure against standards set by the Task Force on Climate-Related Financial Disclosures (TCFD). The Barometer measures companies on the number of recommended disclosures that they make (coverage) and the extent and detail of each disclosure (quality).
According to the Barometer, coverage disclosures continue to move in the right direction, increasing from 84% in 2022 to 90% in 2023.
Yet, quality in climate disclosures remains low at 50% with incremental improvement (+6% YoY) driven only by the need to prepare for increasing requirements for the new International Sustainability Standards Board (ISSB) regulation globally and the Corporate Reporting Sustainability Directive in relation to European reporters .
The Barometer revealed a continued lack of granularity in reporting and the effectiveness of regulation surrounding them. Top markets for climate-related disclosure quality included the UK (66%), Germany (62%), France (59%) and Ireland (55%).
Leaders and laggards
“This year’s report shows there are both leaders and laggards globally when it comes to disclosure, with complexity existing regionally and across sectors,” explained Derarca Dennis, EY Ireland Sustainability Services Lead.
“Unsurprisingly, countries with rigorous disclosure regulation and an engaged investor or policy maker community continue to move forwards, 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.
“It’s encouraging to see that Ireland is progressing well with a small increase in coverage (88% to 89% since last year) and an increase in disclosure quality (55% up from 49% in 2022), however, the challenges that companies are facing globally are equally relevant in Ireland. Businesses need to do more to ensure they do not fall into simply taking a compliance-led approach, but instead, view reporting as the basis for meaningful action to tackle their climate strategy.
“At a time when we should significantly ramp up our transitioning to a net-zero economy if we are to meet our climate commitments, this year’s report indicates that there remains a disconnect between the stated climate ambitions and the corporate actions to achieve them. Climate risk disclosure should not be viewed as a separate tick box exercise, but as an opportunity to inform wider commercial strategy and gain competitive advantage.
“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 decarbonisation strategy is not only embedded, but executed across their operations.”
This year, the report has gone deeper and explored three new areas that will dictate the reporting landscape over the next few years: the level to which climate-related risk and opportunity is reflected in companies’ financial statements, an indicator of a company’s understanding of climate change risks and opportunities, plus its willingness to disclose that understanding; transition planning, to assess if and how companies are moving from commitment to corporate action; and readiness for the additional insights in relation to readiness or adoption of the ISSB S2 standards.
When looking at the relationship with corporate performance, only one in three companies globally surveyed disclose quantitative or qualitative links between climate-related impact in their financial statements, suggesting that climate risk and impact is not being considered equally within financial performance. Furthermore, 42% of companies surveyed fail to perform scenario analysis in the context of the company’s value chain and wider market dynamics.
And, signifying that climate change is still not being viewed in the context of business growth, most companies remain less inclined to disclose their strategies on climate-related opportunities (68%) than those on risks (77%).
Work needs to be done on transition planning; nearly half (47%) of companies surveyed do not disclose how they plan to pivot their business model and operations to align with the latest climate recommendations.
Of those that do disclose plans (53%), the level of detail remains limited. Sectors exposed to the greatest climate risk, unsurprisingly have the most detailed plans including energy (60%), mining (60%), transport (58%), and telecommunications and technology (57%).
Agriculture, however, falls behind, with just 43% of those surveyed in that sector disclosing any form of transition plan.
The report reveals that the companies that have understood the links between climate risk and business growth strategy are well positioned to address the new climate-related disclosure requirements such as the International Financial Reporting Standards (IFRS) S2, but those who continue to simply take a compliance driven approach are more likely to struggle to meet the new climate-related reporting requirements.
The path forward to action
The report cites three critical actions that companies should consider taking to support the global climate agenda:
- Mindset shift from burden to action: In the best performing companies, disclosure is used to drive behavior and action, viewing climate risk compliance as an actionable opportunity. In these companies, detailed and rigorous data disclosure is matched by strategy and action.
- Data driven carbon agenda: Data should not be siloed but should be connected and integrated into risk management and used to drive carbon reduction.
- Boardroom elevation: Climate data should be used at a boardroom level to inform corporate strategy, where leaders take a complete approach to climate impact across the entire organisation.