Published: September 8, 2023
A new climate disclosure standard from the International Sustainability Standards Board asks companies to disclose climate-related information and metrics. The IFRS S2 Climate-related Disclosures standard could become the basis for globally consistent climate disclosure if it is widely adopted.
As companies prepare to implement S2, S&P Global Sustainable1 used S&P Global Corporate Sustainability Assessment data to understand the widely varying levels of climate disclosure around the world.
European companies disclose information on a substantially higher percentage of climate-related questions in the assessment than companies in North America and Asia-Pacific.
Energy-intensive and commodities-related sectors are already ahead of other sectors in reporting on climate-related metrics, but Scope 3 emissions disclosure is still uncommon across the board.
Investors and stakeholders around the world have clamored for more consistent and comparable climate-related disclosures for years, and in June 2023, the International Sustainability Standards Board (ISSB) responded to that call by issuing its first two sustainability disclosure standards. The general requirements standard, or IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, asks companies to disclose sustainability-related risks and opportunities. The climate-related disclosures standard, or IFRS S2 Climate-related Disclosures, asks for specific metrics such as greenhouse gas emissions as well as disclosure of climate-related physical and transition risks and whether companies use scenario analysis to gauge their resilience to climate change’s impact on markets and policy.
The S2 climate standard builds on the work of several existing frameworks, including the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. The standards are formatted like other International Financial Reporting Standard (IFRS) standards, which are used in financial statements in more than 140 jurisdictions. The standards themselves are not binding, but they could form the basis for a unified sustainability and climate disclosure framework for companies and investors globally if different jurisdictions adopt them.
The Corporate Sustainability Assessment's (CSA) climate-related questions broadly reflect the recommendations of the TCFD, making them good proxies for understanding how companies are positioned for S2. Companies are assessed on many climate strategy and metrics topics, 14 of which are directly relevant to S2:
In this analysis, any level of relevant information for these questions is counted as disclosure. The full CSA universe of 13,075 companies used in this analysis includes companies that actively participated in the CSA by answering questions, as well as companies assessed by S&P Global Sustainable1 analysts using publicly disclosed information relevant to the CSA questions.
This binary approach — disclosure of information that covers a question at least partially, or not at all — paints a straightforward picture of companies’ ability to report on some requirements in S2.
Against this backdrop, we used S&P Global Corporate Sustainability Assessment (CSA) data as a proxy to understand how companies are already disclosing climate-related metrics and strategies. Our data shows that reporting on climate-related information varies widely by region, company size and sector. Across the full universe of 13,075 companies assessed in the 2022 CSA, firms disclosed information on 31% of relevant climate-related questions. European companies broadly disclosed information for a substantially higher share of questions than those in other regions, and small and medium-sized enterprises (SMEs) reported on less than half as many questions as larger firms. Companies in the utilities, energy and consumer staples sectors are ahead of other sectors on disclosure, particularly when it comes to measuring emissions. But for several topics, including the financial risks of climate change, the disclosure rate is below 50% for all sectors.
The ISSB’s S1 provides a set of disclosure requirements for reporting on sustainability-related risk management, governance and strategy to investors, lenders and other creditors to help them make decisions about providing resources to a company. S2 requires that entities disclose information about their governance of climate-related risks and opportunities: what controls and procedures the entity has in place; what its strategy is; what processes it uses to identify, assess, prioritize and monitor these risks and opportunities, including progress toward any climate-related targets it has set; and any targets it is required to meet by law or regulation.
In conjunction with S1, S2 also sets out specific climate-related disclosures including climate-related physical and transition risks. Physical risks consider the impact of extreme weather events like hurricanes, flooding and wildfires on business. Transition risks take into account future policy, regulatory and technological changes as well as legal, market and reputational risks. S2 includes sections on climate adaptation, scenario analysis, value chain GHG emission disclosure and any emissions targets a company may have.
In drilling down to some specific elements of strategy and climate metrics that are required under S2, our analysis found there was a high level of disclosure for only a handful of topics. One of those topics was direct and indirect emissions reporting. The majority of companies assessed in the 2022 CSA would be ready to report on Scope 1 emissions, which come from direct operations, and Scope 2 emissions, which are indirect emissions primarily derived from purchased energy. Overall, 58.1% of the 13,075 companies disclosed Scope 1, and 51.4% disclosed Scope 2.
However, less than one-third (29.7%) of companies in our analysis disclosed Scope 3 emissions, which are the indirect emissions that occur up and down a company's value chain as well as when a customer uses the products. For financial institutions, Scope 3 financed emissions come from the investments they make or the loans they finance. Scope 3 emissions can be harder to calculate, partly because they depend on gathering accurate emissions information from suppliers that may operate in countries without disclosure requirements. The lack of transparency and accountability for emissions created in corporate supply chains is a significant challenge when assessing the achievability of climate commitments and completeness of reporting against these targets. Under the ISSB’s S2, companies reporting Scope 3 emissions can have a temporary exemption for a minimum of one year after the standard becomes effective, giving them more time to implement the Scope 3 requirement.
The CSA also includes an assessment of companies' climate-related strategies. Just over one-third of companies were assessing their exposure to climate risks: 37.9% for physical risk and 36.8% for transition risk. A climate risk assessment can show how consideration of climate-related risks, both transition and physical risks, are embedded throughout an organization and how vulnerable an organization might be to climate risk overall.
Fewer companies disclosed information on the CSA questions on financial risks and opportunities due to climate change, such as the effects of extreme weather events on their business; 27.8% of companies disclosed on financial risks, and 28.8% disclosed on opportunities, such as investments in renewables or infrastructure.
Climate reporting varies widely across sectors, according to CSA data. Overall, the utilities and energy sectors and those exposed to commodities and raw materials disclosed information on more climate-related questions, reflecting higher direct exposure to climate-related risks and greater investor scrutiny. Utilities disclosed information on 50% of relevant CSA climate-related questions while energy companies and materials companies responded to 38%. Both sectors are heavily reliant on physical infrastructure that faces growing physical risk of damage and disruption from storms, flooding and other climate hazards.
The energy, utilities and materials sectors represent some of the most carbon-intensive parts of the economy. Fossil fuels produced by the energy sector were responsible for 81% to 91% of human-caused emissions from 2010 to 2019, according to the UN’s Intergovernmental Panel on Climate Change. Nearly 80% of utility companies are disclosing Scope 1 emissions, compared to 73.9% of energy companies.
Consumer staples companies disclosed information on 40% of relevant climate-related questions, reflecting the sector’s exposure to climate impacts on agriculture and commodities. Physical hazards such as drought, extreme heat and more intense flooding are disrupting crop production in many of the world’s largest food-exporting countries.
Comparatively, CSA data shows that climate disclosure is less common among service-oriented sectors. Healthcare companies disclosed information on only 17% of relevant climate-related CSA questions, compared with 25% for communication services companies and 28.5% for information technology companies. The financials sector disclosed information on about 30% of relevant climate-related topics in the CSA but had relatively high Scope 3 emissions disclosure with 35.1% of firms reporting these emissions.
European companies display higher levels of climate disclosure and therefore appear better prepared for applying the S2 standard, the data suggests. They disclosed information on 44% of CSA climate-related questions, compared to 38.4% in Latin America, 27% in Asia-Pacific and 27% in North America. The EU has rolled out several sustainability disclosure rules, including the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR). These also cover climate disclosures. Most European countries require financial reporting using IFRS accounting standards, which could encourage companies to apply the ISSB’s standards.
Direct and indirect GHG emissions disclosure is widespread in Europe, though reporting on value chain Scope 3 emissions remains less common. Almost three-quarters of European companies in our analysis disclose Scope 1 emissions, about 71% report Scope 2, and about 53% report Scope 3.
Disclosure on adapting to physical climate risks was most common in Latin America (20%) and Asia-Pacific (18.7%). The disclosure rate for this topic was lowest in North America at 11.5%. Implementing climate-related management incentives was relatively high in North America, while Asia-Pacific had the lowest disclosure rate on this topic.
Climate disclosure can also vary based on company size. SMEs with fewer than 250 employees disclosed information on less than half as many climate-related questions as larger firms. The burden of reporting may prove onerous for smaller companies, which may have less experience in reporting sustainability data or have fewer resources to devote to such disclosure. According to our analysis, SMEs disclosed information on 14% of climate-related questions, versus 33% of relevant climate-related questions for large companies. Just over 30% of SMEs disclose on Scope 1 emissions, but 62.1% of large companies report on Scope 1 emissions. When it comes to Scope 3 emissions, 13.3% of SMEs disclose while 32.1% of large companies do. About 15.5% of SMEs disclosed information on the CSA topic on climate change strategy, versus 37.1% of large companies.
Firms may also face the challenge of disclosing in different ways depending on where they operate. Under the EU’s Corporate Sustainability Reporting Directive (CSRD) corporate sustainability reporting standards, companies would have to report on general sustainability requirements and disclosures as well as specific topics such as climate change, biodiversity, pollution, water and marine resources, among others. The European Commission said in its proposals that it had been working with global standard setters such as the ISSB to ensure the EU standards are in line with international initiatives.
The CSRD uses initiatives such as the TCFD framework, GHG Protocol and Global Reporting Initiative (GRI) standards as reference for climate-related issues, but differences remain in its specific requirements and how it treats wider sustainability issues. The CSRD anchors the concept of “double materiality,” in which firms need to think of reporting not only in financial terms but also in how their business affects the environment, employees and consumers. The ISSB standards mainly consider how sustainability issues could impact a company’s financial performance.
Looking forward, companies may find themselves reporting on a wider set of sustainability issues than they are used to if the ISSB standards are adopted in their jurisdiction. The ISSB on May 4 launched a consultation on its proposed priorities for the next two years, including biodiversity, human capital and human rights. There is growing realization that biodiversity, natural capital and climate risks need to be addressed hand-in-hand. An April 2023 analysis from PwC found that 55% of global GDP, equivalent to an estimated $58 trillion, is moderately or highly dependent on nature.
Ultimately, the standards will take effect for corporate reporting only if regulators adopt them. The International Organization of Securities Commissions (IOSCO) endorsed the ISSB standards July 25, signaling support for adoption in the 130 jurisdictions it represents. The organization said it is calling on members “to consider ways in which they might adopt, apply or otherwise be informed by the ISSB Standards within the context of their jurisdictional arrangements, in a way that promotes consistent and comparable climate-related and other sustainability-related disclosures for investors.”
The IFRS is set to take over the monitoring of companies’ climate-related disclosures from the TCFD in 2024, which would give it greater oversight on the application of its standards. Some countries, such as the UK, have already made reporting under the TCFD recommendations compulsory, and several jurisdictions have said they plan to use the ISSB as a base for their own disclosure frameworks. The UK plans to hold a consultation on the matter. Hong Kong, Singapore, Nigeria and Canada have each proposed new disclosures based on the ISSB’s climate standard or consultations about mandating disclosures aligned with the ISSB.
The CSA analysis shows there are wide variations as to how companies report climate-related risks depending on their location or the type of climate-related metrics they are disclosing. If climate reporting as required by S2 becomes mandatory in more places, more companies would need to improve their disclosure of value chain emissions, physical and transition risks, and adaptation plans, among other things. Increasing convergence between disclosure standards could also help companies adapt to the evolving disclosure landscape.
This research was prepared by and reflects the views of S&P Global Sustainable1, which is separate and independent from other businesses/divisions of S&P Global, including S&P Global Ratings.