As global climate commitments continue to grow, the importance of accurate and comprehensive climate disclosure has become increasingly critical for companies worldwide. Despite the significant strides made in climate actions and pledges to scale up climate finance, the necessary investments and measures to manage the physical risks associated with climate-related events have yet to materialize. Companies, both large and small, have a pivotal role to play in this global effort, particularly in enhancing transparency and accountability through high-quality sustainability reporting.
Imperative for Climate Disclosure
To effectively scale up private climate finance, investors must have access to reliable information that identifies corporations serious about climate action. High-quality sustainability reporting and comprehensive disclosure of climate actions are essential tools in this process. These disclosures not only provide investors with the insights needed to direct their investments effectively but also serve as a robust management tool for companies. By increasing awareness of the impact of climate change on their operations, companies are compelled to develop strategies, policies, and metrics to address both physical and transition risks associated with climate change, thereby mitigating the adverse effects of their activities.
As climate disclosure becomes increasingly mandatory, the scope of companies engaging in these practices is expanding, now including non-listed companies as well. Furthermore, there has been a significant shift from “single materiality”—which focuses solely on the impact of climate change on a company’s financial performance—to “double materiality,” which considers both the financial effects of climate change and the impact of the company’s activities on the environment.
What Companies Should Expect
To succeed in the evolving landscape of climate disclosure, companies must design a comprehensive framework that covers four key areas:
- Governance: Establishing how the company is structured to identify and manage climate-related risks.
- Strategy: Defining the institution’s strategic approach to responding to climate-related risks and identifying opportunities.
- Risk Management: Articulating how climate-related risks are categorized, quantified, and managed.
- Metrics and Targets: Setting clear goals, such as reducing greenhouse gas (GHG) emissions, and determining how these goals will be measured and tracked.
Initiatives like the Global Reporting Initiative (GRI), the Task Force on Climate-Related Financial Disclosures (TCFD), the International Sustainability Standards Board (ISSB), and the European Union Corporate Sustainability Reporting Directive (CSRD) offer a diverse range of standards for disclosure. While the TCFD and ISSB emphasize single materiality, the GRI and CSRD encompass double materiality. As these standards continue to evolve, companies must prepare for harmonized sustainability reporting by choosing and adjusting to the most suitable disclosure approach.
Challenges in Climate Reporting
Despite the clear benefits of climate disclosure, companies face several challenges in implementing these practices. Small and medium-sized enterprises (SMEs) often struggle to allocate the necessary financial and human resources for reporting, while larger companies grapple with the increasing costs of meeting all required disclosure standards. Additionally, the availability and reliability of data remain significant obstacles, as many businesses lack audited data and face gaps throughout their supply chains. These challenges can limit the scope and accuracy of climate action reporting, making it difficult for companies to meet growing regulatory demands.
The first step for companies in preparing for disclosure is identifying material issues, such as monitoring energy consumption, waste management practices, and calculating GHG emissions, including Scope 3 emissions, which account for indirect emissions throughout the value chain. Once these issues are identified, companies must invest in collecting consolidated data for environmental, social, and governance (ESG) reports. Given the increasingly stringent requirements and varying regulatory frameworks across jurisdictions, closely monitoring the evolving environment is crucial for enhanced compliance.
Role of an Enabling Environment
Company efforts to improve climate disclosure will only be successful if supported by an enabling environment. Financial regulators and supervisors, including securities and exchange commissions, financial services agencies, ministries of finance, and central banks, play a crucial role in shaping the rules that guide companies in meeting disclosure requirements. Policymakers must clarify which entities should report and what information should be disclosed, taking a gradual approach to building the proper framework while allowing companies enough time to adjust and develop the necessary internal processes.
Good practices are already emerging, such as capacity-building programs for directors of listed companies and tax incentives, like those provided by the Malaysian government, which encourage companies to engage in sustainability reporting before it becomes mandatory. Environmental agencies, such as Japan’s Ministry of the Environment, can also contribute by making cross-sector emission factors available, facilitating more efficient GHG emissions calculations.
Preparing for the Future of Climate Disclosure
As corporate climate disclosure transitions from voluntary to mandatory, companies must assess their current reporting strategies and take proactive steps to comply with regulatory standards and meet investor expectations. By investing in identifying material issues, tracking GHG emissions, and collecting consolidated data, companies will be better positioned to navigate the complex landscape of sustainability reporting. Preparing now will ensure that companies are ready to meet the challenges and opportunities presented by a standardized global or national framework for climate disclosure, ultimately contributing to a more sustainable and resilient future.
Reference: https://www.preventionweb.net/news/how-can-policy-makers-help-strengthen-corporate-climate-disclosure-scale-private-climate