Big companies, a brake on climate risk management plans

Protecting the environment involves enormous costs and clearly not everyone is ready to assume them. Only 41% of companies have implemented climate risk management plans, and the companies with the highest emissions are the most flagrantly violating the rules, with the lack of action being a major threat to global environmental goals, according to the EY 2024 Global Climate Action Barometer report. Now in its sixth edition, the barometer analyzes the extent to which organizations around the world report the risks associated with climate change and act to mitigate them.

According to the cited source, most companies have not yet made financial commitments for the level of net zero emissions, given that only 4% reported operational expenses and only 17% reported capital expenses. "A widespread global failure to make long-term commitments to reduce greenhouse gas emissions, with most companies showing a lax attitude towards the full range of emissions. The failure to implement action plans and make financial commitments by companies around the world to manage the risks associated with climate change has disrupted progress towards meeting vital global environmental goals," the report says. The barometer scores companies based on the number of recommended reports they publish (coverage) and the level of detail in each report (quality). The results show that the number of companies providing at least some information on each of the recommended reports is at its highest level since the study began. A score of 100% means that information related to all recommendations is reported, and the average score this year is 94%, an improvement in coverage compared to 90% in 2023. However, the quality of reporting remains at a worryingly low level. The average quality score is 54%, a small increase from 50% last year, indicating that many companies are avoiding reporting the required data. The countries and regions with the highest quality of reporting are the UK (69%), South Korea (62%), Japan (61%), Southern Europe (61%) and Western/Northern Europe (61%), while the Middle East (29%) is at the bottom of the rankings.

• Companies' lack of readiness to meet the targets

This year's barometer clearly highlights the lack of readiness of companies to meet the crucial goals set out in the 2015 Paris Agreement, including the goals of limiting emissions and temperature increases and strengthening the capacity to adapt to the effects of climate change. Only 41% of companies said they had implemented a transition plan to mitigate the risks associated with climate change, only 21% said they intended to develop such a plan in the future, and 38% had no intention of doing so. Among the world's largest emitters, the adoption of transition plans is even lower: just 8% in China and only 32% in the US. In contrast, the uptake of such plans in the UK and Europe stands at 66% and 59% respectively, largely due to successful legislative regimes, underscoring the importance of regulation as a means of incentivising action. This problem is compounded by the fact that even fewer companies have made clear financial commitments to support their transition plans. Only 4% of companies have disclosed their operating expenses (expenses incurred in the course of ongoing business activities) and only 17% have reported capital expenditure (funds invested in a company's assets with the aim of generating future profits), a sign that even those companies that have action plans are not prepared to implement them. "The EY 2024 Global Climate Action Barometer shows a gradual improvement in the quality of climate change reporting in recent years, but also that even the best-performing companies are not implementing strategies to reduce greenhouse gas (GHG) emissions at the speed and scale needed to meet the Paris Agreement's goal of limiting global temperature increase to below 1.5 degrees. This is not surprising, given that greenhouse gas emissions continue to rise, reaching new peaks in 2024. Most reduction targets set by companies are short-term, targeting easy-to-achieve opportunities, mainly at the operational level - such as efficiency improvements under Goal 2, they are not ambitious enough to address the current climate crisis. In addition, a mi "Numerous companies reported having a Transition Plan in place and very few disclosed capital expenditure investments to support these plans, which undermines their credibility," says Massimo Bettanin, Partner Climate Change and Sustainability Services at EY Romania.

According to him, the 2024 edition of the EY Barometer confirms that most companies are still unprepared for the inevitable disruptions to economies. "The growing evidence of multiple planetary boundaries being crossed, which are likely to trigger significant physical risks, together with the increasingly clear signals of a disorderly transition to a low-carbon economy, seem to be poorly reflected in sustainability and financial reporting," he added.

• The optimistic conclusion of the barometer

A more optimistic conclusion of the barometer is that an increasing number of companies (67% of the total, up from 58% last year) are resorting to scenario analysis, in line with TCFD recommendations to assess the size and timing of potential climate risks, continuing the upward trend seen in previous years, while almost three-quarters of companies (71%) used both qualitative and quantitative analyses. However, very few companies (only 36%) are translating the findings of scenario analyses into their financial reporting, a slight increase from 33% last year and 29% in 2022. Even fewer companies (32%) are reporting climate risks with a high financial impact, meaning they face a potential bottleneck in analysing how their finances could be affected. The results also reveal a clear and widespread trend towards short-term thinking, which could affect the path towards net zero emissions. More than eight in ten companies (83%) have set short-term targets to reduce greenhouse gas emissions by 2030, but just over half (51%) have set longer-term targets, and of those, just under a quarter (24%) have submitted their targets to the Science-Based Targets initiative, the organization tasked with developing standards to help companies reduce emissions. Moreover, companies do not appear to be considering the full range of emissions in their transition planning. Just over half of companies' decarbonization initiatives (55%) target so-called "scope 2 emissions," indirect emissions from energy procurement, perhaps because these are the easiest to reduce. Just over a third (34%) included Scope 1 emissions, i.e. those that come directly from sources controlled by the company, and just over one in ten (11%) included Scope 3 emissions, which include all indirect emissions from the value chain, such as those from raw material suppliers. According to the report, the majority of companies (84%) said they carry out risk analyses and give equal weight to "transition risks", which arise from changes in the economy as a result of climate change, and "physical risks", which are a direct consequence of climate change. However, as with scenario planning, companies do not reflect these risks in their financial plans. The report also outlines six steps companies can take today to make the necessary changes: developing a robust action plan, based on science-based objectives, considering detailed scenarios and supported by financial investments; reflecting climate risks in financial statements and exploring financial opportunities; leveraging data in decision-making and driving action on risks and opportunities; providing sustainability teams with sufficient resources, namely the funds, information and human resources needed to meet the formulated objectives; equipping management with the necessary skills to ensure effective governance of the transition strategy; exploring cross-sectoral cooperation, including with government and public sector institutions.

The EY Global Climate Risk Disclosure Barometer study presents an annual picture of compliance with the recommendations in organizations' reporting on climate change risks, in sectors that are likely to be significantly affected globally.