Engagement, consistency key to bridging climate reporting gaps

Many organisations are finding new opportunities from environmental, social, and governance (ESG) disclosures, in terms of strengthening their business strategies and risk profiles. But there is a still a lot of progress to be made, as companies continue to face challenges in sourcing and applying climate-related information.

The percentage of companies disclosing information aligned with the Task Force on Climate-related Financial Disclosures' (TCFD's) recommendations has been increasing each year, according to the 2022 Status Report from the TCFD. "For fiscal year 2021 reporting, 80% of companies disclosed in line with at least one of the 11 recommended disclosures," the report said.

As part of its assessment, the TCFD reviewed publicly available reports of more than 1,400 companies from eight industries and five regions to formulate its analysis of the trends and challenges facing organisations in this area.

Companies disclosing information in line with the TCFD recommendations in annual reports has also increased each year, the report said. However, the report found that only 4% of organisations disclosed all 11 recommended disclosures, and around 40% disclosed in line with at least five.

Climate-related reporting has increased across regions over the past three years, the report said. Europe continues to lead in this area, with 60% of companies reporting in line with the 11 TCFD recommendations. The Asia-Pacific region reported at the second-highest level at 36%, up 11 percentage points from 2019.

Reporting on strategy (climate-related risks and opportunities) is the most disclosed area across the board, with risk management sitting at a below-average disclosure rate, and governance remaining the least disclosed recommendation, the report said.

The report found that many companies are lagging behind in scenario analysis. "The majority of companies do not disclose information on specific scenarios," the report said, with low levels of disclosure around the resilience of a company's strategy to climate-related issues.

Continuing challenges around scenario analysis and methodology are highlighted in the report — over 50% of preparers indicated that implicating the resilience of their strategies under different climate-related scenarios is very difficult, and over 20% of preparers noted challenges surrounding data collection and methodology related to Scope 3 (greenhouse gas emissions) disclosures.

To gain insight on improvements needed, the survey asked user respondents how companies could improve the usefulness of their disclosures, the report said. Many user respondents identified the following improvements companies could make:

• Disclose the actual and potential financial impacts of climate-related issues on their businesses, strategies, or financial planning.
• Use a standard scenario to assess the resilience of their strategies to climate change.
• Report climate-related targets in a consistent way across companies.
• Increase the number of companies disclosing climate-related financial information.

From the practical insights derived from the case studies of seven companies from financial and nonfinancial organisations, the report found that engaging with a wide range of stakeholders, leveraging public disclosures of peers, and making early preparations can improve governance reporting in climate-related disclosures.

While many preparers noted challenges around gathering data, the report also found that as companies disclosed more information related to governance data, the more evolved and comprehensive their own organisational charts on climate-related roles became over time.

"The main barrier for many companies towards disclosing climate-related information is that the data and methodologies for producing climate-related metrics over extended time horizons are still relatively immature compared to traditional financial metrics," the report said. "… Our primary piece of advice for companies beginning to address climate-related risks and opportunities is that they cannot wait until the data and methodologies are perfect to begin their disclosure journey."

— To comment on this article or to suggest an idea for another article, contact Steph Brown at Stephanie.Brown@aicpa-cima.com.