Climate disclosure: knowledge powers change
Angel Gurría, OECD Secretary-General
Everybody is interested in the impacts of what companies are doing – shareholders, clients, the media, governments… And as recent experiences as well as the current discussions at and around COP21 show us, the environmental practices and impacts of doing business are coming under increasing scrutiny.
Workers want to know whether pension funds for example are investing their savings for the transition to a green economy – or whether they are supporting the carbon lock-in that we are trying to move away from. According to Bloomberg, at least 14 energy companies are facing shareholder resolutions on environmental and social policies, and more than 190 resolutions were proposed in 2014, an 88% increase compared to 2011. Investors are starting to base decisions on environmental criteria too. A recent report to the Storting, the Norwegian parliament, reveals that the world’s largest sovereign wealth fund, Norway’s Government Pension Fund Global, has divested from 114 companies on climate grounds “whose business models [are] considered unsustainable in the long run”.
Where the big players lead, the others will follow, and firms would be well-advised to incorporate good environmental practices into their modes of operation. It is not the OECD’s role to say how they should do this of course, but we can help by reaffirming the importance of what is being done through credible reporting to the global community. Concretely, firms can use the standards the Norwegian pension fund cites as the basis for its decisions: “The mandates require that the work shall be based on internationally recognised standards like the UN Global Compact, the OECD Principles of Corporate Governance and the OECD Guidelines for Multinational Enterprises. These international standards define corporate governance norms, and express best corporate practice expectations on the handling of environmental and social issues”.
So what kinds of information do companies that respect these OECD guidelines have to report? Under the “Disclosure” chapter of the OECD Guidelines for Multinational Enterprises, companies are expected to provide both financial and non-financial material information, including “foreseeable risk factors”. Companies are well-aware that climate change and other environmental impacts may now pose foreseeable material risks to their supply chains, their installations and their clients. The G20/OECD Principles on Corporate Governance specifically include environmental risks among foreseeable risk factors and the 2011 update of the OECD Guidelines introduced a reference to reporting of greenhouse gas emissions produced by the company both directly (from its transport fleet for example) and indirectly (for instance by consuming energy generated by fossil fuels).
Corporate “climate information” seeks to give a balanced overview of how climate change could affect a business for better or worse. For example a firm that produces air conditioning equipment may expect demand for its products to grow if summers continue getting warmer, but if the regulations on energy consumption of electrical goods are tightened, it may find itself with a product line that no longer meets the new standards. Businesses also have to consider impacts beyond their immediate operations and look at the whole supply chain. A firm seeking to reduce its carbon footprint would favour a supplier using renewable energy rather than fossil fuels for example. Disclosure would mean that these companies would describe what they are doing to react to opportunities and risks through their strategies, governance, and policies to mitigate climate impacts and to adapt to and manage the effects of climate change.
By identifying climate-related risks and opportunities, this information will help to integrate climate into core decision-making processes by companies. Consumers, investors and governments will find this information useful, but collecting this information makes good business sense too by showing where a firm could streamline processes; reduce costs; and improve efficiency. And yet despite the long-term advantages of incorporating climate factors into company strategy, a 2014 climate disclosure study by CERES of US companies found that over 40% do not include any climate-related information in their filings and a 2015 study by Influence Map warns that investors are not getting a full picture of how regulation aimed at tackling climate change would affect the performance of the companies in which they invest. The situation is similar for asset owners. A survey by the Asset Owners’ Disclosure Project shows that nearly half of the top 500 global asset owners have done nothing to protect their investments from climate change. Only 7% calculate their portfolio’s emissions; a mere 1.4% have reduced their carbon intensity since 2014; and none have assessed their portfolio-wide exposure to fossil fuel reserves. Other recent studies reach similar conclusions.
Part of the reason for this poor performance is that climate disclosure is a relatively recent discipline and many companies are struggling to understand the importance of collecting and reporting climate information. On the other hand, there is also evidence that companies are increasingly providing climate information on a voluntary basis, such as under the CDP, which operates on behalf of over 800 investors.
They would be helped by improvements to government reporting schemes, and there would be a lot to gain from aligning the different schemes so as to make the disclosed information reliable and comparable across borders. A report by the OECD and the Climate Disclosure Standards Board shows that while 15 of the G20 countries have mandatory reporting schemes in place or in preparation, most schemes only require reporting of emissions within national boundaries, which results in emissions produced throughout most of the value chain being left out. The majority of schemes require emission data to be verified, but only a minority require third party-verification which means that the information may not be reliable. Only a few schemes ask companies to report on climate change-related risks they face or their strategies to address those risks.
The good news is that both governments and investors are ready to scale up climate disclosure and the use of climate information. France for example recently issued legislation requiring investors to report on their portfolio’s carbon footprint, and Sweden may soon follow. And the Financial Stability Board has just announced the creation of an industry-led disclosure task force on climate-related risk.
All these initiatives are encouraging. Knowing what we’re doing about climate change helps us to do it better.
COP21: Getting the most out of corporate climate change disclosure: Event at COP21 on 10 December chaired by Mr Gurría. The discussion focused on four themes:
- How could reporting frameworks be streamlined to ensure that disclosure is meaningful?
- What kind of approach can best scale up corporate disclosure: mandatory law, voluntary standards, a combination of both?
- What kind of corporate climate change disclosure is needed to foster change in corporate management?
- What other incentives are needed to make disclosure work in support of the climate agenda?