By: Louie Woodall, Editorial Lead at Manifest Climate
Climate disclosures are the hottest trend in corporate reporting. The Task Force on Climate-related Financial Disclosures (TCFD) has stirred a movement that’s garnered support from over 3,400 entities and prompted policymakers in the US, Canada, the UK, the European Union, and others to mandate climate reporting.
The challenge is making sure these climate disclosures yield decision-useful information for investors and other stakeholders. Right now, there is a patchwork of frameworks, standards, and requirements that address what climate-related information companies should report and how it should be formatted. While many of these guidelines and requirements can trace their lineage to the TCFD, they do not all align perfectly. Furthermore, in countries where climate reporting is still not mandatory, companies have broad latitude to interpret disclosure recommendations as they fit. The end result is a smorgasbord of climate reports that don’t allow for meaningful comparisons between companies on the type, number, and scale of climate risks and opportunities that they face.
This is a problem because unstandardized, noncomprehensive data makes it harder for investors to accurately price climate risks and identify high-yielding climate opportunities. It also leaves room for unscrupulous actors to “greenwash” their activities through disclosures that are based on cherry-picked data.
Flawed climate reports aren’t just a problem for investors. Ultimately, if the information that firms broadcast is more noise than signal, then the public risks being misled about the pace and scale of corporate efforts to reduce climate change, as well as companies’ work to prepare for the unavoidable physical impacts of a hotter planet. This could cause policymakers to take their foot off the pedal when it comes to implementing regulations and fronting capital to ensure the low-carbon transition proceeds in a timely manner.
Stakeholders require a level playing field so they can compare and contrast corporations’ climate disclosures. This is a big challenge and one that’s largely delegated to international standard-setting bodies, most notably the International Sustainability Standards Board (ISSB), which was set up last year to produce a “global baseline” for sustainability- and climate-related disclosures. But even if the ISSB succeeds with this task, there’s still no guarantee that the “baseline” will be adopted globally. Individual jurisdictions will add and subtract from the standards as they see fit — if they refer to them at all. Remember, the ISSB cannot compel countries to embrace its vision of what climate disclosures should look like.
The simple truth is that if stakeholders want a level playing field, they’ll have to put in the work themselves. Here are four steps that can be taken to tackle this challenge:
1. Cut through the chaos
Stakeholders have to tune out extraneous information in companies’ climate reports and focus on meaningful signals. But how do they separate the meaningful from the meaningless? The key is to use a system for classifying decision-useful climate information that can be applied to all kinds of disclosures. A high-quality taxonomy like this can identify which pieces of information are important for assessing a company’s climate risks and opportunities, and which should be disregarded.
2. Benchmark best practices
In order to compare different companies’ disclosures, stakeholders need to set a benchmark. This requires them to identify companies that exhibit disclosure best practices. Stakeholders need a way to gauge the quality of each decision-useful disclosure, which can in turn reveal how deeply climate issues are considered by companies’ managers. Whatever method used must be standardized and applicable across companies and sectors. Climate groups, nonprofits, and private sector businesses are all working to identify disclosure best practices. Their findings can be used as a first step to establish a benchmark and start ranking individual disclosures.
3. Map the path to climate competence
Once stakeholders know how much decision-useful climate information a company is reporting and how its disclosure practices rank relative to climate leaders, they may find it helpful to understand what steps companies can take to reach the best practices benchmark. If a stakeholder is judging two companies that fall short of the benchmark for different reasons and wants to know which one to prioritize for engagement, knowing the specific actions that the companies should take could help.
4. Stay ahead of the curve
Climate disclosure is in its infancy, but it’s evolving rapidly. This means tomorrow’s best practices are likely to look different from today’s. Stakeholders need to stay on top of climate reporting trends so that they know when and how to iterate their disclosure taxonomies and best practices benchmarks.
These common-sense steps can help stakeholders parse meaningful, comparable information on companies’ climate disclosures and make informed judgements on the type, number, and scale of their climate risks and opportunities.
About Manifest Climate:
Manifest Climate is the leading Climate Risk Planning solution. Our proprietary software and in-house climate experts help businesses identify climate risks and opportunities, build internal climate competence, better align their disclosures with global reporting frameworks, and stay on top of market developments and peer actions. Get in touch with our team here
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