December 4th, 2018 by Joshua S Hill
A new report published last week has shown that only 44% of Europe’s largest companies track the business impact of climate change and environmental challenges in their annual reports.
The new report, entitled First Steps: Corporate climate & environmental disclosure under the EU Non-Financial Reporting Directive, was published last week by environmental nonprofits Climate Disclosure Standards Board (CDSB) and CDP (formerly the Climate Disclosure Project), analyzing the annual reports of the 80 biggest publicly-listed companies in Europe which, together, comprise a combined market capitalisation of €3.75 trillion. The report is the first comprehensive review of the implementation by companies of the European Union’s Non-Financial Information Directive (2014/95/EU) — the Union’s key legislation obliging companies to report how they manage social and environmental matters.
Interestingly, the report shows that uptake of the Directive’s new requirements in annual reports has been slow — especially when compared to the more complete environmental data reported separately to CDP through its own disclosure platform. Key findings from the report include:
- 83% of companies disclose their business model in some shape or form
- 99% disclose their policy approach to at least one key non-financial aspect
- 76% disclose the role of environmental or climate change matters in their financing and investments
- 79% identify at least one climate or environmental risk
Unsurprisingly, though, the report also highlights several areas for improvement. Specifically, only 48% of the sample described their due diligence processes for climate and environmental risks, and only 13% identified the time horizon associated with an identified climate or environmental risk. Further, and maybe most damningly, only 39% of all companies disclose Scope 1, 2, and 3 emissions, and only 41% disclose their greenhouse gas emissions.
Three in four companies annual reports include a business model description that falls short of European Union guidelines, and less than one in four include a clear statement that climate or environment is even a part of their overall due diligence process.
“Climate and environmental information is material for an understanding of these large businesses and must be presented to investors in a consistent and comparable way,” said Mardi Mcbrien, Managing Director, Climate Disclosure Standards Board. “The way to help companies achieve this is to clarify and strengthen the NFR Directive by specifying its requirements.”
The report also analyzed the extent to which companies’ reporting practices align with the recommendations of the G20 Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) — which, according to the authors of the report, represent a new best-practice in climate change reporting and which is also endorsed by the European Commission. Specifically, according to the report, 38% of companies reference the TCFD in their annual reports, revealing that implementation is already underway. However, while 60% of companies disclose that responsibility for environmental issues sits with a certain board member, only 15% actually name climate change specifically.
“To scale up the adoption of the TCFD at the pace and quality needed to bring a realistic picture of climate-related financial risk to the market, mandatory implementation of the 11 recommended disclosures is needed,” said Mardi Mcbrien. “While we have seen progress by companies on such disclosures, all companies need to discuss the impact of climate change on their business, as outlined by the TCFD recommendations. Aligning these recommendations with the Non-Financial Reporting Directive presents an opportunity to streamline the EU corporate reporting landscape.”