Review of 80 of Europe's biggest companies finds continuing gap between environmental risks listed in reports and concrete actions being taken to address them
Less than half of Europe's largest companies currently identify and explain how they are managing risks posed to their business by climate change and environmental impacts, despite EU guidelines designed to strengthen company reporting.
That is the key conclusion of a review published today by non-profits CDP and the Climate Disclosure Standards Board (CDSB), which analysed the annual reports of 80 of Europe's biggest publicly listed companies.
The findings were collated using five reporting requirements contained in the Non-Financial Reporting (NFR) Directive, the EU's key legislation setting out firms' obligations to report their management of social and environmental issues. The rules apply to around 6,000 EU companies with more than 500 staff.
CDP, which operates its own independent environmental data disclosure platform for companies, said its review found low uptake in company reports of the new guidelines set out in the NFR Directive.
It also found significant "reporting inconsistencies" in company reports, which it said made it more challenging for investors to compare information on environmental and climate change risks.
For example, three in four company reports include a business model description which falls short of EU guidelines and fewer than a quarter include a clear statement that climate or environment is part of their overall due diligence processes, the report found.
Moreover, there exists a large gap between companies' stated risks and concrete actions being taken to address them, CDP said. The NFR Directive asks for information on environmental risks, but while 79 per cent of reports identified at least one climate or environmental risks, as many as 80 per cent do not prepare a specific climate change strategy to mitigate these risks, the review found.
In addition, only 41 per cent of company reports disclose low carbon transition risks, such as the potential for future regulation and policy changes, which are likely to have material business impacts.
The report said companies tended to perform better on environmental risk disclosure in countries such as the UK and France where non-financial reporting was mandatory before the NFR Directive came into force in 2014. All French and UK company reports analysed included current greenhouse gas emissions, it found, compared to just 56 per cent of German firms and 81 per cent across the EU as a whole.
Mardi Mcbrien, managing director of the CDSB, said the NFR Directive should be strengthened to specify the reporting requirements for companies. The legislation is earmarked for review next year by the EU Commission as part of its sustainable finance action plan, potentially providing an opportunity for a strengthening of the guidelines.
"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," she said. "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."
The comes alongside separate findings today from the EY's latest climate change and sustainability survey of 220 institutional investors around the world, which found an increasingly strong focus on ensuring long-term value from their assets.
As many as 97 per cent of respondents said they conduct either informal or structured evaluation of a target company's non-financial disclosures when deciding future investments, up from 78 per cent in 2017.
And, nearly all investors surveyed - 96 per cent - said that such information has occasionally or frequently played a pivotal role in decision-making, while 89 per cent believe that environmental, social and governance (ESG) disclosures will become more valuable in the event of a market downturn or correction.
Institutional investors' demand for prescriptive nonfinancial accounting standards is also on the rise, EY said. 59 per cent of investors surveyed said that better accounting standards for non-financial information would be very beneficial, an uptick of 26 percentage points from the survey in 2017.
Additionally, the risk or history of poor governance practices would cause 62 per cent to rule out an investment immediately, compared to 27 per cent in 2015, the survey found.
Mathew Nelson, EY's global climate change and sustainability services leader, said investors were now requesting more and higher-quality nonfinancial data from public companies, and seeking consistent, investment-grade information to support their decision-making. "With the greater focus on long-term value creation, companies need to get ahead to meet these disclosure demands so that their organisations are best positioned for receiving investment," he said.
However, CDP and CDSB's report provides further evidence that growing demand from investors for enhanced ESG and climate reporting is still struggling to cut through. Earlier this year a progress report on corporate engagement with the recommendations put forward by the Taskforce on Climate-related Financial Disclosures similarly studied 1,800 large companies globally and found "relatively few" had embraced the body's guidelines.
Investors, campaigners, and many leading businesses are united in recognising that comprehensive climate dicslosures and ESG reporting helps reduce risk and aid financial and non-financial performance. But many firms are still managing to duck the best practice guidelines on how to report, often privately pointing out that investors' commitment to demanding comprehensive ESG disclosures is more evident in press statements than it is in practice.
And yet, until more firms fully embrace effective climate risk reporting pressure from activist investors and calls for tougher mandatory reporting rules will only grow.
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