At the 2023 United Nations Climate Change Conference (COP28), countries agreed to take collective action to move away from fossil fuels. This first-ever consensus aims to put an end to oil, gas, and coal use in energy systems and sets ambitious targets to triple renewable energy and double energy efficiency by 2030 — keeping the 1.5°C Paris Agreement goal within reach.
COP28’s bold aspirations toward decarbonization highlight the urgent need for the climate disclosure landscape to evolve rapidly. Climate reporting plays a crucial role in helping us understand whether the whole economy and the sectors and companies within it are moving towards true transition.
This is the first article in a two-part series that will discuss insights from COP28. In this first part, we will discuss insights from the fifth EY Climate Risk Barometer covering current trends in global climate risk reporting, uneven progress within markets and sectors, the adoption of mandatory climate disclosure requirements, and core elements that will shape the reporting landscape.
TRENDS IN CLIMATE RISK REPORTING
The fifth EY Climate Risk Barometer reveals that companies are making progress in climate-related disclosures but fall short of carbon ambitions. This study analyzed 1,500 companies in 51 countries based on two metrics: the number of disclosures made per the recommendations by the Task Force on Climate-Related Financial Disclosures or TCFD (coverage) and the extent and detail of each disclosure (quality).
Climate transparency is clearly on the rise, with the quality score jumping from 44% in 2022 to 50% in 2023. This trend suggests that companies are putting in the time and effort to enhance the information shared with stakeholders. However, the 50% score reflects minimal advances, considering the TCFD has been around for eight years, which some may say has already been ample time for companies to fine-tune their reporting.
Alongside the increase in quality, disclosure coverage saw a steep year-on-year increase. Company scores soared from 84% to 90%. Yet, pressing concerns remain, particularly about the granularity and quality of disclosures and the effectiveness of the regulatory environment in driving genuine action beyond reporting.
Meanwhile, the average score for governance disclosure quality climbed from 46% to 52%, partly due to regulatory pressure — but this is still low. Transition planning remains patchy, with only half of the companies (53%) presenting clear roadmaps. Furthermore, companies continue to focus more on risk than opportunity analysis (77% vs. 68%) despite a slight improvement in the latter.
UNEVEN PROGRESS WITHIN MARKETS AND SECTORS
From a market perspective, Japan, South Korea, the Americas, and most of Europe are leading in disclosure quality. This is unsurprising as these countries and regions can draw on several years of mandatory TCFD disclosures.
On the other hand, while the Middle East and Southeast Asia have made strides in disclosure performance compared to last year, these regions are still lagging. To accelerate progress, governments can adopt mandatory climate disclosure requirements. This can potentially change the currently low scores to a significant extent.
Sector-wise, companies with the most exposure to transition risk dominated disclosure scores again. Energy leads in both quality and coverage, but its quality performance is greatly matched by financial institutions (e.g., credit bureaus, exchanges, and financial services providers) with a 46% to 54% year-on-year leap. In fact, this year saw changes in quality across the board, with the biggest ones in information technology (IT), real estate, mining, and agriculture.
Companies across all sectors face heightened demand for detailed disclosures of their climate-related risks alongside financial implications. This pressure comes from government regulators, investors, and the public. As such, the shift in scores is linked to stakeholders, putting pressure on businesses heavily reliant on fossil fuels to lay down their decarbonization plans and start making progress. In the case of financial institutions, investors are urging them to reduce their brown lending.
This is good pressure, however, as climate risk management strategies must not be separate from corporate reporting. Businesses must view climate disclosures as a comprehensive, forward-looking effort to understand the anticipated financial impact. Therefore, it should be assessed in the context of the company’s value chain and wider market dynamics.
IFRS S1 AND S2
It is worth noting that many companies are embracing comprehensive sustainability reporting frameworks like the Global Reporting Initiative (GRI) Standards alongside the International Sustainability Standards Board (ISSB) disclosure requirements — the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. These standards unveil material climate risks and opportunities, allowing investors, lenders, and creditors to assess companies’ governance, strategy, environmental, and societal impacts.
The ISSB offers “transition reliefs” to help companies ease into new sustainability reporting standards. In the first year, companies can prioritize and report only climate-related information and publish disclosures together with their half-year report. They can also hold off disclosing their Scope 3 greenhouse gas emissions, a report that uncovers climate exposure within their value chains.
In this country, the Board of Accountancy (BoA) is laying the groundwork for the adoption of the ISSB disclosure standards with Resolution No. 44. The date of adoption is being determined by the BoA, the Securities and Exchange Commission (SEC), and Financial and Sustainability Reporting Standards Council (FSRSC) — previously known as the Financial Reporting Standards Council. To ensure smooth implementation and evaluation, the FSRSC established the Philippine Sustainability Reporting Committee (PSRC), which is set to issue local interpretation and guidance for IFRS S1 and S2.
3 ELEMENTS AFFECTING FUTURE CLIMATE DISCLOSURES
In addition to companies’ disclosure performance against TCFD recommendations, this year’s research also included three core elements that will shape the reporting landscape for the next few years. These are:
ISSB preparedness. This refers to the readiness to meet IFRS S2 requirements, marked by changes in 1) Governance: adopting the increased ISSB disclosure requirement and disclosing whether organizations have the necessary skills at the board level to oversee climate-related strategies; 2) Strategy: deepening climate disclosures, both by analyzing detailed scenarios for future impacts and setting value chain emission targets alongside overall emission reduction goals; and 3) Metrics and targets: moving towards disclosing businesses’ most significant Scope 3 emissions.
Transition planning. This refers to the move to include concrete transition plans — how companies will adapt and grow as the global economy transitions to net zero — in their business strategy and disclose the details to stakeholders.
Climate risk reflection in financial statements. This refers to the integration of climate risks into financial statements, quantifying potential losses from stranded assets and valuing assets based on their resilience to climate change.
FROM A COMPLIANCE BURDEN TO A STRATEGIC ASSET
It’s time to view climate risk reporting as a strategic resource instead of a compliance burden. Instead of using frameworks solely for disclosure, forward-thinking organizations analyze how climate impacts their business strategy. High-risk businesses, such as those in energy and IT, can evaluate risk management and financial impact using these insights to chart resilient growth strategies and identify key vulnerabilities.
By establishing robust data governance structures, they turn climate data into a potent tool that will help them thrive in the face of climate challenges. When companies embrace the spirit of reporting frameworks to drive underlying business changes, they realize financial, customer, employee, societal, and planetary value from the effort.
The next article in this series will discuss strategies from the Ernst & Young (EY) keynote session at COP28. Philippine companies should consider these urgently to move from setting ambitious goals to achieving tangible results that will shape the country’s reporting landscape for the next few years.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Benjamin N. Villacorte is a climate change and sustainability services partner of SGV & Co. and the chairman of the Philippine Sustainability Reporting Committee.