As the expectation of increased climate risk disclosure in financial services firms grows, so have fears of firms “greenwashing” disclosures to appear on track, whilst actual actions and claims underpinning their statements have very limited substance.
A study recently undertaken by ClientEarth on some of the UK’s largest companies found a worrying trend in FTSE 250 listed firms, with their analysis citing that UK firms are “woefully inadequate” in disclosing how climate change will impact their business.
Highlights from ClientEarth’s study included:
- 50% of companies mentioned some sort of ‘Paris-alignment’ or ‘net-zero’ target in their reports, but many provided limited details
- Only 4% of businesses made a clear reference to climate change-related factors in their financial accounts
- Only 4% of audit reports provided a clear explanation about whether the auditors had considered climate change-related factors in their audit
- 40% of companies do not refer to climate change-related risk in the ‘principal risks and uncertainties’ section of their annual report
- Fewer than 25% of companies clearly reference the impact climate change will have on their business model
- 15% of companies still fail to disclose their Scope 1 and 2 greenhouse gas emissions
Daniel Wiseman, a lawyer on Client Earth’s climate finance team, said many firms had their head in the sand.
“Current disclosure practices indicate that many firms appear to be either ignoring or denying the systemic impact climate change and the zero-carbon transition will have on their business. Regulators, auditors and investors are letting them get away with it.”
With such damning criticism of some of the largest firms in the UK and their regulators, an uptick in regulatory requirements is inevitable.
In January 2021, Her Majesty’s Treasury (HMT) set out its latest consultation paper for occupational pension schemes, with the Financial Conduct Authority (FCA) set to follow with their own consultation in H1 2021.
In the meantime, what are some of the ‘no regrets’ activities firms could be putting in place ahead of the tidal wave of regulation?
- Assign ultimate and shared accountability for climate risk:
Despite the word “risk”, FourthLine have seen many different accountable individuals for climate risk. These have included the CEO, CFO, CRO, COO, Chief Legal Officer or Chief Compliance Officer, depending on the organisation. Owning climate risk at the top of the organisation is critical to setting a climate culture, like risk culture, that permeates through the organisation.
- Review existing risk registers / libraries for areas where climate change will exacerbate risk factors:
Reviewing existing risks in your risk library to signpost those which may be increased by a changing climate, be that from the physical risk or transition risk of climate change, is a good way to develop thinking in the organisation
- Establishing the interplay between ESG and Climate Risk:
Whilst there are common interests and overlaps between the two, FourthLine sees the need for clear delineation between ESG and Climate Risk. Being clear on a RACI model between the two will allow stronger ownership of each area and progress to be measured
- Strategy and mission statement setting:
Board and senior leadership need to be clear on what type of organisation they want to be in respect of climate risk. Being clear on the mission statement and how the strategy with align to this vision will allow clear cascading of these objectives through the business. Without these, it makes it harder to create a holistic climate culture working to defined goals.
For further insights on getting started on implementing your climate risk framework, please download our insights deck HERE.