Businesses fall short on climate strategy and action, despite advances in reporting

This year’s EY Global Climate Risk Barometer suggests a deep disconnect between organizations’ climate and corporate strategy. Despite agreeing to climate commitments, nearly half (47%) of those surveyed don’t disclose a transition plan to back these. Supporting this, 74% of respondent companies do not include the quantitative impacts of climate risk in their disclosures, implying that climate change is not being considered in the same way as other material impacts and reflective of a broader trend for climate strategy to remain separate from corporate reporting.

Despite improvement in the coverage of (+6% year-on-year (YoY))and quality of disclosures (+ 6% YoY), notably in the developing economies, the pace of corporate change remains too slow as we reach a point of no return where improvements in disclosures are not enough, and transformative corporate action is required at scale.

The report, now in its fifth year, is an established benchmark that scores the progress being made in both coverage and quality of climate-related disclosures. It examines more than 1,500 businesses in 51 countries to assess performance disclosure against standards set by the Task Force on Climate-Related Financial Disclosures (TCFD). The Barometer measures companies on the number of recommended disclosures that they make (coverage) and the extent and detail of each disclosure (quality).

According to the Barometer, coverage disclosures continue to move in the right direction, increasing from 84% in 2022 to 90% in 2023. Yet, quality in climate disclosures remains low at 50% with incremental improvement (+6% YoY) driven only by the need to prepare for increasing requirements for the new International Sustainability Standards Board (ISSB)regulation. The Barometer revealed a continued lack of granularity in reporting and the effectiveness of regulation surrounding them. Top markets for climate-related disclosure quality included the UK (66%), Germany (62%), France (59%), Spain (59%), the US (52%). However, India (36%), China, and the Philippines (both 30%), Indonesia (22%) were cited as needing marked improvement.

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“Data up to the end of October revealed that 2023 was about 1.4oC above pre-industrial levels, due to  the continued rise in carbon emissions from fossil fuel burning and to the return of the El Niño climate pattern. At the opening of the COP28, the UN Secretary General António Guterres called for a drastic cut in emissions “since current policies are leading us to an earth-scorching 3oC temperature rise”. Following a decade of increased regulation around companies’ sustainability disclosures, the focus is now on action, and on moving from commitments and targets to tangible results. This year EY Barometer report revealed improvements in terms of the quality and coverage of climate-related reporting. However, while an increasing number of companies invested time and energy into engaging with new regulations, such as the ISSB IFRS2 and CSRD ESRS1, the overall picture is concerning.

According to the EY research, only 53% of companies under the scope of the survey are providing disclosure against some kind of transition plan. In the UK, a leading country for carbon-related disclosure, over 80% of UK listed firms say they are committed to becoming net zero by 2050. However, just 5% of those firms have publicly disclosed detailed, actionable transition plans. While it is fair to say that many companies are extensively disclosing their long-term net zero targets, there is still limited evidence of companies disclosing actual planning in the short- and medium-term or progress to date on the commitments they have made.

Time is running out for keeping global warming to a below -2°C trajectory and there is no doubt that expectations are rising. So, now is the time to move beyond the simple collection and analysis of data to comply with more stringent reporting requirements and use data to inform operational and strategic decisions as well as implement effective transition plans that factor current physical and transition risks and incorporate plausible future risk scenarios that might impact the companies going forward. We are currently experiencing an historical transition. Leaders have a great opportunity to go beyond short-termism and basic compliance and embrace the decarbonization as a competitive driver for their business strategy,” says Massimo Bettanin, EY Romania Climate Change and Sustainability Services Partner.

This year, the report has gone deeper and explored three new areas that will dictate the reporting landscape over the next few years: the level to which climate–related risk and opportunity is reflected in companies’ financial statements, an indicator of a company’s understanding of climate change risks and opportunities, plus its willingness to disclose that understanding; transition planning, to assess if and how companies are moving from commitment to corporate action; and readiness for the additional insights in relation to readiness or adoption of the draft ISSB S2 standards.

Corporate performance

When looking at the relationship with corporate performance, only one in three companies surveyed disclose quantitative or qualitative links between climate-related impact in their financial statements, suggesting that climate risk and impact is not being considered equally within financial performance. Furthermore, 42% of companies surveyed fail to perform scenario analysis in the context of the company’s value chain and wider market dynamics. And, signifying that climate change is still not being viewed in the context of business growth, most companies remain less inclined to disclose their strategies on climate-related opportunities (68%) than those on risks (77%).

​Transition planning

Work needs to be done on transition planning; nearly half (47%) of companies surveyed do not disclose how they plan to pivot their business model and operations to align with the latest climate recommendations. Of those that do disclose plans (53%), the level of detail remains limited. Sectors exposed to the greatest climate risk, unsurprisingly have the most detailed plans including energy (60%), mining (60%), transport (58%), and telecommunications and technology (57%). Agriculture, however, falls behind, with just 43% of those surveyed in that sector disclosing any form of transition plan.

Compliance readiness

The report reveals that the companies that have understood the links between climate risk and business growth strategy are well positioned to address the new climate-related disclosure requirements such as the International Financial Reporting Standards (IFRS) S2, but those who continue to simply take a compliance driven approach are more likely to struggle to meet the new climate-related reporting requirements.

The path forward to action

The report cites three critical actions that companies should consider taking to support the global climate agenda: