More companies are disclosing climate-related financial information but not enough is useful to assess climate risk, according to the Task Force on Climate-related Financial Disclosures (TCFD). Plus, investors from ClimateAction 100+ warn many pledges are not supported by credible plans.
- Two separate reports show that even though companies are making progress in disclosing climate-related information, it is not leading to meaningful change.
- This highlights discrepancies between company pledges on climate and action taken in the real world.
- Climate-related disclosure is essential to assess climate risk, which is beginning to affect prices for certain types of assets.
The G20’s advisory body the TCFD and investor-led initiative ClimateAction 100+ have published two separate reports analysing the decarbonisation commitments of some of the world’s largest companies.
TCFD calls for more urgent progress in climate disclosure
The Task Force analysed the publicly available climate data of over 1,400 companies from eight industries and five regions. It found that all regions have significantly increased their levels of disclosure over the past three years.
In 2021 reporting, 80% disclosed in line with at least one of the 11 disclosures the TCFD recommended in 2017. Only 4%, however, disclosed in line with all the 11 recommendations, which are intended to promote transparency in support of climate-risk management.
The TCFD expressed concern that not enough companies are disclosing “decision-useful” climate related financial information, which hinders efforts to assess climate risk in investment decisions.
Michael R. Bloomberg, chair of the Task Force and founder of Bloomberg and Bloomberg Philanthropies, said: “Climate risks are also financial risks, and more measurement and disclosure are crucial to building a more sustainable and resilient economy and a safer future.”
ClimateAction 100+ warns progress on commitments is not matched by credible plans
Climate Action 100+, an initiative backed by 700 investors responsible for over $68 trillion in assets under management, has selected the 165 companies that account for 80% of global corporate industrial greenhouse gas emissions.
In its latest benchmark assessment, it found that company activities do not yet show meaningful changes in business models in line with the Paris Agreement goals. For example, less than one third of the electric utility companies it analysed have a coal phaseout plan that matches limiting global warming to below 2°C.
Researchers did find that the focus companies had continued improving their disclosures when compared to previous analysis. For instance, 75% of focus companies have committed to achieve net zero emissions by 2050 or sooner, up from 66% in March 2022.
Ninety one percent of focus companies have aligned with TCFD recommendations, a 2% increase from six months prior. Only a fifth of focus companies quantified key elements of their decarbonisation plans, however, suggesting a lack of strategies or concrete plans to deliver net zero targets.
The lack of action, matched with insufficient climate data, suggests that companies are not effectively factoring climate risk into their strategies. This raises questions about the companies’ ability to quantify the financial consequences of climate risk and the energy transition, and therefore to make the right investments to secure a sustainable future.
Climate risk is starting to affect markets
Disclosure of climate-related data is essential for investors, lenders, and insurance underwriters so that they can include climate risk in their decisions. The TCFD said that climate risk is already affecting prices of certain assets and identified three themes which are common across markets.
Firstly, near term climate risks are more likely to be priced in compared to the risks expected to materialise in the longer term. This means that the market is focusing on transition or policy risk rather than physical climate risk.
Secondly, the effect of transition risk on prices has increased since the Paris Agreement but varies based on news cycles, elections and the availability of new information.
Finally, uncertainty around climate risks has been raising premia as it increases concerns around a company’s future cash flows.
While there has been some improvement in climate risk disclosures, the level of climate risk in both physical and policy terms seems to be on the increase – companies are simply not keeping up.
As progress on commitments and improvements in disclosure continue to improve, it will be critical to understand which companies have effective strategies for implementing change and which have little credibility. Transparency on commitments and actions must improve to properly address climate-related challenges.