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Climate risk reporting: the business case

Climate risk reporting has steadily grown in 2019 with more and more businesses starting to include it in their annual reports

Two-thirds of UK companies will disclose climate-related risks, and opportunities through climate risk reporting, in their 2019 annual reports, according to a recent survey of board members from the UK’s top 500 companies.

The number of businesses that have reported, or intend to report, on climate risk has steadily increased during 2019, ahead of advice by the Environmental Audit Committee that it should become mandatory by 2022.

The Task Force on Climate-related Financial Disclosures (TCFD), part of the Financial Stability Board which oversees and makes recommendations on the global financial system on behalf of the G20 major economies, released a framework to help companies develop a more effective climate-linked financial disclosure in 2017.

However, despite the large numbers of organisations committed to climate risk reporting, less than a quarter will submit reports in 2019 that are in line with the recommendations laid out by the TCFD.

Need for climate risk reporting

Interviewing board members from top UK companies, the Carbon Trust found that 72% of respondents believed that climate risk reporting offered reputational benefits that had directly impacted on the value of their brand over the previous three years.

A further third believed that better reporting had allowed them access to additional financial benefits, such as improved access to capital and a better credit rating.

Significant numbers of respondents also pointed to reduced pressure from both shareholders and activists (37%), attracting a wider range of investors (29%) and increased company valuation (21%).

Alongside the benefits that many businesses perceive that climate risk reporting offers, increasingly, ensuring that you are already doing so mitigates the potential impact of incoming mandatory requirements. The 2018 IPCC special report highlighted that companies have just a decade to help avert serious and irreversible climate change.

Given that context, the TCFD’s 2019 report on progress since their framework was introduced made for disappointing reading, stating that, despite an upturn in reporting, levels remain insufficient for investors and other stakeholder groups that utilise disclosures in their decision-making process.

Both Governments and financial institutions took note. In June 2019 Mark Carney, Governor of the Bank of England, confirmed he believed mandatory reporting was needed, adding that there will be a focus over ‘the next few years’ on getting it right before implementation.

The UK’s Green Finance Strategy goes one step further, concurring that there is an expectation for all listed businesses and large asset owners to disclose in line with TCFD recommendations by 2022.

The UK Government has already announced a taskforce to examine the most effective approach to disclosure, including the option of mandatory requirements.

How to report on climate risk

As the TCFD’s report acknowledges, rigorous climate-related reporting doesn’t happen overnight, requiring the collaboration and expertise of a wide range of corporate functions to achieve reporting objectives.

That being said, there are a number of key objectives that an effective climate risk report should look to achieve.

The ultimate goal is to improve potential investors’ and other stakeholders’ ability to understand the impact of climate risk on an organisation, reducing the risk of systemic financial shock due to climate change. It should also identify the opportunities that changes in climate, and the increasing momentum towards addressing concerns, could generate.

These potential impacts generally fall into two broad categories: transition impacts, reflecting the risks and opportunities associated with changes in the economy, and the physical impacts of climate change (e.g. temperature, rain fall, weather etc.)

Five key areas to cover when beginning the process of establishing effective climate risk reporting are:

  • Understanding what the impacts of climate change will be, how policy will be shaped to deal with them and the financial impact of both on your business
  • Identify current best practice on climate issues and ways that can be adapted for your own business
  • Ensure processes are in place to allow your organisation to respond effectively to findings
  • Robust data capture systems to allow both current performance and the impact of any changes to be effectively monitored
  • Ensure that you are prepared to meet any requests for climate risk information from investors

 

The TCFD’s framework is a good place to start as you begin to implement your own climate risk reporting.

To find out how Inenco can support you in understanding how climate change and surrounding legislation will impact your business and how to prepare for it, contact our team on 08451 46 36 26.