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Reckoning with the cost of climate risk disclosure

© Shutterstock / Miha CreativeHands holding a graphic of the world showing symbols relating to loss of biodiversity

A significant challenge for those embarking on new approaches to climate risk disclosure requirements is the cost of engagement.

The SEC has estimated that compliance with its disclosure rules could cost between half and three-quarters of a million dollars. And that’s the cost for compliance with reporting only on Scope 1 and 2 emissions, which would be required for smaller reporting companies (SRCs) or those with less than $250 million in available shares.

Since April 2022, over 1,300 of the largest UK-registered companies and financial institutions must now disclose climate-related financial information on a mandatory basis, along Task Force on Climate-Related Financial Disclosures (TCFD) recommended lines.

That means responding to a framework of 11 overarching recommendations for disclosure over four thematic areas: governance; strategy; risk management; and metrics and target.

The goal of climate risk disclosure

The goal is to ensure that economic actors across the board can provide decision-useful data for stakeholders, on how they plan to or do manage material risks and opportunities arising from climate change.

This new rule will affect many of the UK’s largest traded companies, banks and insurers, as well as private companies with over 500 employees and £500 million in turnover.

While it may currently only have an impact on some of the country’s largest companies, their need for accurate data will rapidly mean requiring such information from the supply chain. And that is going to be costly.

Financial risks of climate risk disclosure compliance

An impact assessment undertaken by the UK government suggested that the overall cost of compliance would be £145 million a year, averaging out at over £111,000 each, although differences will apply.

The challenge in reporting certainly comes with starting from scratch, needing to understand their obligations, setting up internal reporting, independent auditing and more.

In the UK, while the requirement for a full climate scenario analysis has been dropped, a qualitative assessment of resilience against different scenarios is still required. Scenario analysis will certainly help companies assess their climate related risks and opportunities, but will also add another layer of cost.

What do companies get out of the Reckoning with the climate risk disclosure process?

A recent survey, conducted by the Sustainability Institute by ERM (ERM) for Ceres and Persefoni, found that on average corporate issuers are spending $533,000 annually on climate-related disclosure, while institutional investors are spending an average of $1,372,000 annually to collect, analyse and report climate data to inform their investment decisions.

What it also highlighted was respondents’ perspective on the benefits of such disclosure.

Climate risk disclosure benefits for issuers

For issuer respondents, the highest ranked benefit was better performance in meeting sustainability, climate, ESG and SDG goals, followed by better access to data capable of enhancing corporate strategy.

Some issuers also cited “lower cost of capital” as a benefit, and a correlation was found between spending more on overall climate-related disclosure and recognising a lower cost of capital.

Climate risk disclosure benefits for investors

For investor respondents, the highest ranked benefit was meeting client demand for climate disclosures and related products, followed by better performance in meeting sustainability, climate, (Environmental, Social, Governance) ESG and (Sustainable Development goals) SDG goals.

Opportunities

The big opportunity lies in finding ways of minimising the cost of such disclosures, no matter the jurisdiction, while improving the quality of the data.

That means coping not simply with mandates but also a range of reporting frameworks, as well as accounting and assurance standards.

Kentaro Kawamori, CEO and founder of climate management and accounting platform Persefoni, said: “Persefoni has proven that climate disclosure costs drop significantly with the use of audit-grade carbon accounting software, and we believe that economies of scale will reduce costs further as more companies start disclosing.”

ESG reporting and ESG data products growth

According to analysis from consultancy Opimas, the ESG data products market hit over $1 billion in 2021. This is a market covering ESG research and analysis, as well as ESG indices and passive investment products like exchange-traded funds (ETFs).

This market has grown at a rapid pace, but the growing requirements of the market in jurisdictions around the world means that a market for technology and services targeted at getting the right data from companies in the right way is set to explode.

The next step for the sector, and for industries around the world, lies in understanding what technologies are available, what they cost and whether they’re appropriate for your business long term.

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