How do we connect the dots regarding climate transparency? This has been a question which management teams have been forced to contend with in recent years as it is continuing to create a challenging dialogue between institutional investors and public companies. Over the last twelve months, net-zero and carbon emission targets have risked falling off the top of companies’ agendas.
The ongoing macroenvironment has had a devastating effect on economies and company valuations alike, causing a shift in focus away from sustainability in favour of financial performance.
However, there are organisations fighting to keep sustainability front and centre for major corporations. One such body is the Task Force on Climate-Related Financial Disclosures (TCFD).
Established after COP21 in Paris by the Financial Stability Board, the TCFD’s mission is to provide guidance and recommendations to market participants on how to mitigate the risks of climate change. They do fantastic work and currently over 1,300 of the largest UK-registered public & private companies and financial institutions are required to disclose climate-related financial information in alignment with the TCFD.
Notwithstanding the work of the TCFD and many other global organisations, corporates are increasingly taking a step back in the implementation of climate transparency. In a recent webinar hosted by the LSE on “Understanding Climate Transparency in Financial Disclosure”, Nicola Higgs, Partner at Latham & Watkins, argued there has been a clear shift away from the ESG agenda which had begun to take precedent in recent years. Despite the acute concerns about the global 2050 net-zero ambition, companies are now heading back towards a “profit and revenue first” way of thinking.
Unfortunately, one does not have to look too hard to find ample evidence to support this theory. For example, banks in the US, including JPMorgan, have suggested that they may withdraw from the Glasgow Financial Alliance for Net Zero (Gfanz), another international climate-related regulator, as they seek to be “managed by and subject only to their own governance structures.”
Moreover, the cost of reaching carbon neutrality is also very high. It will cost over USD130 trillion in the next three decades to reach the net zero emissions agreed in the COP21 Paris Agreement and London alone will need to spend £75 billion to reach the UK’s goals of becoming carbon neutral by 2030.
Laura Zizzo, co-founder and CEO of Manifest Climate, agreed with Mrs Higgs but passionately argued that even in spite of the challenging macroeconomic environment, there is still room for companies to attain a strategic advantage from having ambitious ESG agendas. She stated that aligning with international initiatives such as the four pillars of the TCFD, will have a positive impact on long-term financial performance.
Taskforces and alliances such as the TCFD and Gfanz have the incredibly difficult task of ensuring these global deadlines are met. Improved reporting metrics and mandatory requirements being applied more broadly to the world’s largest businesses will help bodies such as the TCFD to achieve their goals. Ultimately, there is no way out of it: climate change will have to be tackled.
Communication forms a central pillar to driving this change. Improving the consistency and transparency with which a business is required to report on their sustainability commitments builds trust between a business and their stakeholders.
As the entire world pivots to reach net-zero by 2050, it is critical that climate related disclosure remains at the top of corporate agendas.