A lack of “decision useful” climate disclosures has been a cause for discontent on both sides of the investment value chain.

By Veena Ramani

In the run-up to next week’s COP26 in Glasgow, we are seeing a renewed focus on corporate climate reporting. Just last week, both New Zealand and the UK put rules in place requiring financial organizations to disclose, and act, on climate-related risks and opportunities. The Canadian Securities Administrators recently proposed rules that follow a similar approach.

These pressures have led to historically high levels of climate and ESG reporting. On the surface this sounds ideal – but lack of “decision useful” disclosure in what companies are actually reporting has been a cause for discontent on both sides of the investment value chain. While investors are awash in corporate disclosures, they still don’t have relevant information about climate change’s impacts on companies’ financial plans and performance. Companies, on the other hand, are increasingly frustrated with the persistent pressure to disclose more, without apparent impact.

Reports released just over the past couple of weeks underscore this gap. The 2021 Status Report of the Taskforce for Climate Related Financial Disclosure (TCFD) finds that disclosure of the financial impact of climate change on companies’ businesses and strategies remains low. In a similar vein, the European Financial Reporting Advisory Group’s recent assessment an assessment of European companies’ sustainability reporting identified inadequate disclosures on future cash flow implications of sustainability strategies and targets, summarizing that the link between sustainability strategies and companies’ financial objectives is “quite limited.”

The missing piece in this puzzle is strategy – while many companies are already in the process of positioning themselves to make the shift to net zero, very few of them are communicating how climate change affects their plan to create value now and in the future. In fact, recent research from FCLTGlobal found that while 81 of the 100 largest public companies in the world have established a climate change targets, only 17 even mention climate change in their strategic plan presentations. Only five detail how their plan for long-term value creation incorporated their climate ambitions.

This state of affairs is particularly concerning given the stakes in Glasgow. The most contentious component of the talks will be coming to a shared understanding on the trajectory needed from industries, companies, and assets that are still “in transition.” Given the lack of clarity from policymakers, companies need to be transparent about their climate transition plans.

Very few companies exist in the binary state of “clean” or “dirty.” Most recognize the need to adapt their businesses to strike a balance between rapid decarbonization with their responsibility to continue to generate value for themselves and their stakeholders. How they find that balance is the core of their climate transition plan. It needs to be an integral part of their long-term business strategy, including thinking on climate impacts on the corporate business model, external operating environment, goals and targets, capital allocation plans, risk management framework, and accountability mechanisms, identified by FCLTGlobal as foundational components of long-term strategy.

Investors rely on this level of detail to assess their comfort with the company’s vision and whether it matches their own portfolio strategy and vision for assets in transition. This meeting of the minds is needed to generate the scaled and sustained capital flows that will support the net zero transition, a stated goal of COP26.

Climate disclosure which does not incorporate these elements is nothing but a “check the box” exercise. Which makes it all the more timely that brand new guidance from the TCFD has underscored the importance of climate transition plans. Companies should begin developing robust climate transition plans, having conversations with their shareholders, and ensuring that their climate transition strategies inform their reporting, and not the other way around.

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