While most companies are aware of the financial cost of climate change, they have yet to put measures in place to combat climate-related risks such as providing board members financial incentives to make climate change part of their business strategy, a new report found.
Climate change and how businesses deal with it is becoming an increasingly important issue for investors as they demand more transparency to help them evaluate the investment risks related to a changing climate.
But based on responses from 1,681 companies across 14 countries and 11 sectors, only one in 10 firms provide financial remuneration for board members to tackle climate-related risks to their business, according to the report jointly published by not-for-profit organizations the Climate Disclosure Standards Board and the CDP, which provides a global environmental disclosure system for investors.
"There is a still gap between oversight and strategic action within an organization," Simon Messenger, managing director of Climate Disclosure Standards Board, said in an interview.
He added that financial incentives are usually provided to sustainability teams within an organization but need to be applied at a management level.
"[When it] isn't linked directly to the bigger organizational strategy, there is always going to be a gap," he said, adding that this "is going to mean that environmental and financial strategies won't be delivered in sync as efficiently as they could be."
Trend expected to reverse
However, the trend will reverse in the near future as companies increasingly apply frameworks on disclosure such as the one created by the G20's Task Force on Climate-Related Financial Disclosure, or TCFD, in June 2017, according to Messenger.
"I expect the awareness of those risks to escalate significantly over the next year or so to allow a situation where 80% of board oversight actually means 80% of the board [having a strategic understanding] of the risks and opportunities," he said.
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The report looked at the four areas of disclosure identified by the TCFD — governance, strategy, risk management and metrics and targets. Companies in France, Germany and the U.K. lead other countries in governance, risk management, metrics and targets, and the report said that North American companies are lagging behind their European peers in terms of board-level oversight. Only 68% of companies in Canada and the U.S. have board oversight compared to 90% in France, Germany and the U.K.
"Culturally and from a regulatory perspective, this has been at the front of the agenda [in Europe] for a number of years," Messenger said, adding that regulation at EU-level and within individual countries had helped shaped awareness among European businesses. "That has knock-on consequence because companies are thinking about it. It means they are more engaging with investors, and it's kind of a virtuous circle that promotes continual progress."
China, financial sector lagging behind
Chinese companies are lagging behind in the four areas of TCFD disclosure, the report said, adding that upcoming mandatory environmental reporting by 2020 in China will have an impact in the future.
The report also said the financial sector was lagging behind other sectors — except healthcare — in terms of disclosure about emissions related to transportation, business travel, fuel and energy, among others. One of the reasons may be the lack of a standardized methodology, the report said, while underlining the need for progress given that 50% of financial companies do not currently recognize the relevance of some emissions in their investments.
"There are a lot of different communities that work closely with both the investment community and the broader banking system to get them to understand the impact that their portfolio has on the environment, but there is a lot of global work that is required in terms of developing the right methodologies for understanding this impact," Messenger said.
He added that the financial sector had progressed by "leaps and bounds" and that he expects to see the most progress from this industry in the next five to 10 years, saying it holds "huge sway." That is because if the financial sector were to decide to stop investing in a company presenting climate risks, then the company "will have to change their strategies to make themselves more financially stable, and by doing that, they will help the wider sector become more environmentally sustainable."

