By Iggy Bassi, CEO & founder, Cervest
The curtains have closed on COP26 and despite the jury still being out as to whether the Summit was a success, climate action is driving regulatory change with very real implications for businesses. In the near future, UK and US companies will be required to disclose their climate risk. Following the latest release of Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, mandatory reporting is now being steadily rolled out across the UK and will be fully in place by 2025. In the US, President Biden released an Executive Order “to advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk”. Companies in both the UK and US need to take action now to get ahead of mandatory disclosure coming into force.
How prepared are organisations?
A recent report from Climate Intelligence company Cervest surveyed 800 UK and US business decision makers on their climate strategies. They found a significant gap between company awareness and company preparedness for climate risk reporting. Ninety percent of companies are aware of the pending disclosure requirements, but the majority still need to invest in talent and software to fulfill these requirements. Sixty three percent of companies claim they are planning to disclose their climate risk within the next 12 months, but many will need to invest in new solutions to meet new regulations.
Companies that are already voluntarily reporting are taking action to embed climate risk strategies into decision-making across their organizations. However, 42% lack the actionable climate insights necessary to report on their climate risk. Even when they have access to data, companies are finding translating it into meaningful insights a challenge because climate data is often complex and fragmented. This is why companies are seeking software and tools to help them implement their climate disclosure.
It is clear that Climate Intelligence is in demand, yet only 37% of organisations have plans in place to adapt with climate change. Without the necessary insight to make plans to build resilience, companies cannot hope to make accurate disclosure on their climate related financial risk. Even with the best intentions, lack of clarity on climate risk could lead to underreporting or wrongly attributing carbon emissions.
Getting ahead on climate disclosure could be a competitive advantage
There are clear and tangible benefits to getting ahead on disclosure and building the capacity . Climate risk is financial risk. The survey revealed that 83% believe disclosure will have a positive financial impact on their organization. For instance, access to climate insights allows businesses to disclose their climate risk to meet regulations and avoid possible fines, and it will also allow businesses to put climate at the core of every decision. From taking actions that protect assets against increasingly volatile weather events, to finding opportunities for future investment, Climate Intelligence is crucial for future business operations. Those planning to invest in the insights, software and training necessary to become climate literate stand to gain a significant competitive advantage within their industry sector.
With frameworks like the TCFD still evolving, what is really needed is standardization on climate risk. To make disclosure reporting valuable, climate intelligence must be derived from a single, standardized source of truth. Universal disclosure standards would ensure accountability, transparency and trustworthiness across industries, and allow for cross-industry comparisons. We also need standardization in place to resolve disclosure conundrums facing organisations with multinational assets, or those who work across multiple industries.
Net Zero is essential but insufficient
While COP26 progress on Net Zero may not have met expectations, it’s clear that organisations are not waiting for policy to set ambitious climate goals. The survey found the vast majority (88%) of respondents are setting Paris-aligned emission targets (Net Zero by 2050). However, in focussing on Net Zero, companies need to be careful not to overlook adaptation. Decarbonization is essential, but it’s insufficient. Companies need adaptation strategies in place to build climate resilience and be prepared to face the already locked-in effects of our changing climate. Overall, Cervest’s survey results highlight that integrating physical risk and adaptation into their climate risk strategies will strengthen organisational climate resilience and enable more coherent disclosure reporting.
It’s clear that businesses are motivated to remove barriers to accurate climate-related financial disclosure. With an increasingly volatile climate, a greater frequency of extreme weather events, and mandatory disclosure rapidly approaching, it comes as no surprise that companies are pursuing a number of different activities to improve their climate literacy and build capacity for climate intelligent decision-making.
The ability to accurately quantify climate risk and carbon footprint presents a complex accounting challenge for many companies, requiring significant upskilling, monitoring and resourcing. Yet, as more forward-looking companies take a climate intelligent approach to disclosing their climate risk, others will follow, leading to a global network of climate intelligent organisations that will drive climate change transformation in a more positive direction and at a greater scale.