Climate Disclosure: A Tool Underestimated by Companies

By Pianpian Wang

You might be familiar with the concept of financial disclosure, which refers to the financial performance and condition of a company (usually a listed company). With the increased attention to climate change impacts, climate disclosure is brought to the spotlight in recent years.

What Information is Included in the Climate Disclosure

The core of the climate disclosure lies in the value of corporate climate change-related information, which helps society and firms to recognize the impact of business decisions in the context of climate change. It is noted that climate disclosure is categorized under Environmental Information Disclosure, which consists of one of the three important pillars of Environmental, Social, and Governance (ESG) reporting.

There is no universally agreed definition of “corporate climate change-related information”, but it generally includes details of some or all of the following:

  • The strategy, governance practices and policies implemented by companies to mitigate, adapt to and manage climate change impacts such as extreme weather events, resource shortages and changing market conditions;
  • Resource consumption that affects climate change, including fossil fuels;
  • Production of waste and pollutants that affect the climate including greenhouse gas (GHG) emissions;
  • The principal risks and opportunities expected by the company as a result of climate change, for example, demand for new products, regulation related to climate and supply chain resilience.

To respond to investor demand for company disclosure on climate change risks, the US Security Exchange Commission (SEC) issued its Interpretive Guidance on climate disclosure (“the 2010 Climate Guidance”) in February 2010. This guidance does not create new legal requirements or modify existing ones. According to a survey that examines the state of such corporate reporting and associated letters on climate change, most US listed companies’ climate disclosures in their public company reports are very brief, provide little discussion of material issues, and a large number of companies fail to state anything about climate change in their annual filing with the SEC. 

The Role of Climate Disclosure is Underestimated

There are many reasons why the listed companies do not resonate well with the SEC Guidance. One missing incentive is that this Guidance is not a mandatory requirement for the listed companies to disclose climate change-related information. More importantly, most of the listed companies have underestimated the value of climate disclosure.

This conception might change soon since a recently released study shows how public sentiment influences the market pricing of firms’ sustainability activities and therefore the future stock returns of portfolios that integrate ESG data.  According to the data presented in the study, public sentiment about a company’s sustainability activities has significant implications for the company’s market valuation. In other words, the greater positive public sentiment about a company’s ESG programs, the more market values increased for the company and its sustainability initiatives. The study also mentions that investors will avoid investing with companies that have a negative public sentiment even if they have strong ESG performance.

The findings expressed in the study indicate that there are 3 crucial aspects to draw a link between a company’s sustainability activities and increase a company’s market value. First, it is not a waste of company resources to develop programs dedicated to the environment, society, and corporate governance. Secondly, companies need to disclose information about their sustainability to the public and proactively respond to given feedback. Last but not least, incorporating the public helps engage them with sustainability activities.

Nowadays, companies are not only expected to operate in a responsible manner, but are increasingly asked to demonstrate its impacts publicly, including employees, shareholders, banks and insurers, customers and local communities, as well as the general public.

Unveiling the Climate Disclosure Standards

If a company wants to garner positive public sentiment, then where should they start?

Regardless of company size, Environmental Information Disclosure is generally the entry point for a company to start communication with the public and monitor their sentiment about corporate impact on the environment. Among all the environmental information, climate change-related information has dominated the mainstream media and discussions in these years. What’s more, surveys show that many American expect negative effects and life changes due to climate change.  Therefore, a company should re-examine the impact of its products and business in the context of climate change, and strategically increase transparency to the public.

For those companies who seek systematic guidance on climate disclosure, there are three types of voluntary climate disclosure standards available as options to guide companies on disclosing climate change-related information:

Three standards are interrelated to each other. The first two standards have shared similar reporting principles. Also, many reporting contents of the CDSB framework are in line with the TCFD recommendations. The SASB standard served as an implementation tool for the TCFD recommendations. It is noted that the CDSB framework can be applicable to all industries, while the SASB standard would require some industries to submit supplemental disclosures to be consistent with the TCFD recommendations.

It is worth mentioning that climate disclosure is not something exclusive for listed companies. Some private companies have also adopted the above standards as guidance to examine their supply-chains and business operations in the context of climate change, particularly to understand GHG emission hotspots. All three standards include carbon emissions as a part of required disclosure information. The CDSB framework offers a very flexible way for companies to choose the scope of carbon emissions disclosure, as long as the organization “takes into consideration a transition to a lower carbon economy consistent with a 2°C or lower scenario” and reflect such considerations in their internal policies. On the contrary, the SASB standard gives very clear disclosure indications regarding Scope 1 and 2 emissions, while Scope 3 is not included in the requirement. Instead, the SASB standard has a seperate supply-chain management section to fill the gap.

Conclusion

Thanks to the explosive development of social media platforms, the communication between companies and the public is no longer a one-way street. Companies who do not take the initiative to disclose information or engage a conversation on issues that the public cares about, would likely lose their opportunity to obtain more market share. Multinational companies should realize that traditional environmental information disclosures are inadequate if the full spectrum of climate change-related information is incomplete from their corporate initiatives and ESG disclosure. Meanwhile, considering the fact that it does take effort for a company to compile and disclose such information, a comprehensive GHG emission report under the climate disclosure is the ideal starting point for medium and small-sized companies.

If you have any questions on climate disclosure standards or GHG emission reporting, please feel free to contact us here