A survey of over 1,600 global companies suggests that while U.S. firms are gradually working to manage climate risk, they generally lag European peers at incorporating such risks into long-term strategic planning.
The schism between North American and European companies regarding climate risk planning is among the key findings in a March 19 joint report commissioned by research group CDP and the Climate Disclosure Standards board.
The report lists BlackRock Inc., Vanguard Group Inc., State Street Corp. and Aviva Plc as among the institutional investors leading the charge on corporate climate risk disclosure, each putting their weight behind the Financial Stability Board's Task Force on Climate-related Financial Disclosures, or TCFD, framework. The report, spread across 14 countries, found broad uptake of the TCFD's key pillars — board governance, strategic planning, risk management and performance metrics — among large European corporations, owing in part to existing European Union regulatory reporting requirements.
Institutional investors have long held that climate risk management and associated strategic planning begin with board-level oversight. Over 90% of companies surveyed from the UK, France, Germany, Japan and India have established mandates at the board-level for climate risk oversight, the survey found. By contrast, U.S. firms reported 66% for board-level oversight, making it the lowest among surveyed countries.
"Overall, we see there is a surface level of preparedness from companies globally to have board level oversight of climate risk and opportunity," CDP task force engagement director Jane Stevenson said, noting uptake driven by investor activism and changing consumer preferences. "2018 is the year when companies need to step up climate action as we approach a tipping point. Fundamental to this is driving board level engagement with climate risk throughout the organization."
To increase board-level uptake in the U.S., investment banks are being urged to press corporate clients on implementing the TCFD framework, while alternative sustainability accounting frameworks are seeking to better align with TCFD for carbon-intensive industries. Taking board oversight a step further, the report pointed to tying management and board compensation to key TCFD performance metrics with respect to carbon-intensity, rather than allotting such incentives to a company's sustainability team alone.
Should more corporate boards move to adopt climate oversight in their governance, translating that oversight into long-term strategic planning and risk management remains a critical hurdle. Of the firms surveyed, 87% indicated that climate change risks and opportunities, whether tangible or intangible, are "integrated into company wide processes" as standard practice.
But roughly half say they report climate-related strategy to the board annually, with about one third of firms indicating their strategic planning outlook related to regulatory, reputational and physical risks do not exceed six years.
The report noted that internal carbon pricing serves as one key indicator of the long-term strategic incorporation of regulatory risk, though only 15% of U.S. firms currently use internal carbon pricing, the lowest among countries surveyed. And where only 57% of U.S. firms indicate they consider the impact of climate-related reputational risk on brand value, compared to the global average of 63%, U.S. companies are signaling deeper concern with the physical ramifications of climate change on their operations and assets.
According to the report, 82% of U.S. firms have identified physical climate impacts as a key consideration in their risk management, in line with the 83% global average. Of the respondents, 30% said tropical cyclones represent a key risk driver, the highest among sectors surveyed.
S&P Global Inc., the parent company of S&P Global Market Intelligence, is a signatory of the Task Force on Climate-related Financial Disclosures.