The business case for tackling climate change is increasingly mainstream with widespread take up of the global effort to achieve the Paris Agreement goals. Fundamental to this is driving board level engagement with climate risk throughout an organization - The Task Force on Climate-related Financial Disclosures (TCFD) has built on CDP's mission to take global disclosure into the boardroom and beyond.
New research from CDP and CDSB shows that while a significant majority of companies report board oversight of climate-related matters, only 1 in 10 currently provide incentives for board members to manage climate-related risks and opportunities.
However, there is still a gap between the way companies identify climate-related risks and opportunities and how they are preparing to tackle them. CDP and CDSB’s latest survey of 1,681 companies across 14 countries and 11 sectors looks at the four areas of disclosure identified by the TCFD - governance, strategy, risk management and targets and metrics. It highlights whether companies in specific sectors and countries are best prepared to disclose information under those themes.
Differences across sectors and regions: France, the UK and Germany leading the way
The research shows some regions and sectors are better equipped to manage climate risk than others. Companies in France, the UK and Germany are leading the way in disclosing information on areas including Governance and Risk Management, while companies in South Korea, India and Japan are ahead on disclosures under Strategy.
Conversely, companies from China, as well as in the healthcare and financial sectors are lagging behind in the four TCFD pillars.
There is widespread acknowledgement that climate change poses financial risks for business, with 83% of companies recognizing the physical risks, with increases in precipitation and tropical cyclones being the main source of concern, and 88% identifying policy changes as the main risks of transitioning to a low-carbon economy.
Driving change from the boardroom
The missing link could be incentives for leadership on climate change in the boardroom. Incentives to manage climate risk could be more robust, and the survey highlights that only 12% of 1,681 companies (205 companies) motivate board members to manage climate change issues in this way. Germany has the highest proportion at 29%, while the UK has the highest absolute number (56 companies). Japanese sectors show positive results: almost all sectors have some companies that provide incentives for the Board.
Regulatory risk and impact on future business strategy
The research shows 1,477 companies identify regulatory risks as having the potential to generate substantive change in their business operations, revenue or expenditure. The Asian Pacific region counts a higher proportion of companies recognizing this than companies in Europe and North America.
The energy sector was most concerned about the impact of regulatory risk on its future business strategy. The most common regulatory risk driver identified is fuel and/or carbon taxes (50% of 1,681 companies), followed by Cap and Trade schemes and Emission reporting obligations. Other risk drivers include uncertainty surrounding new regulation, general environmental regulations, air pollution limits and product labelling standards. A high proportion of British companies (76%) have identified fuel and/or carbon taxes as a major risk driver.
The challenge ahead
One of the key recommendations from the FSB TCFD is for organizations to describe the resilience of their strategy to different climate-related scenarios, including 2°C or lower. CDP’s new sector-based reporting cycle has aligned to the TCFD recommendations providing companies and investors with more comparable peer to peer insights to drive strategic decision-making.
Nine months on from the launch of the TCFD recommendations we are seeing a real catalyst for disclosure across many geographies. The challenge now is to move that disclosure on and embed it into corporate strategy and culture from board to the front line and set real emission reduction and renewable targets.
This is the year when climate action needs to be stepped up as we approach a tipping point in 2020. The management of environmental issues can no longer be the sole responsibility of sustainability teams: it needs to be a priority area for companies’ boards to be agents of cultural change across organizations.