Separately, the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) conducted its first major review of disclosures in line with its 2017 recommendation report. It found that while the majority of companies disclosed some information, it’s still early days for climate-related financial disclosures and further work is needed for disclosures to contain more “decisionuseful” climate-related information. In particular, few companies were able to disclose the financial implications of climate risks, something the investor community is keen to understand.
Each year, we assess more than 30 indicators of corporate sustainability performance across the world’s top companies. One key indicator is the natural capital cost that a business carries. Natural capital is the limited stock of the Earth’s natural resources on which business and society depends for prosperity and well-being, and it is declining at an alarming and unsustainable rate.
Last year’s results showed a sharp increase in companies’ natural capital costs, which had previously been falling. This year’s results show a continued increase in costs — albeit far smaller — and a sharp decline in natural capital costs as a share of net income.
There are positive signs that companies’ environmental impacts and resource use are beginning to decouple from growth in some areas, with corporate carbon emissions declining nearly 10 percent globally over the last five years, in absolute terms, and renewables providing a rising share of energy consumption.
Company awareness and engagement with climate and environmental issues also seem to be increasing rapidly, with 80 percent of companies reporting exposure to physical or market transition risks associated with climate change, and a similar share engaging in reducing corporate emissions. There has been a steady growth in the number of companies applying an internal carbon price, and that price has been rising. Furthermore, an increasing number of companies are disclosing natural capital costs.
Yet again, many of the largest and most persistent impacts occur within company supply chains and products rather than their direct operations. Encouragingly, many more companies quantify and report on these impacts, although progress remains to be made on reporting. Another encouraging sign of real progress: A substantial share of companies report engaging with their customers and supply chains to better understand their behavior and positively influence environmental impacts such as carbon emissions and water consumption.
Supply chain risks from climate change are likely to become more important in the form of exposure to physical risks and disruption, as well as new regulation and capital market shifts supporting the delivery of the U.N. Sustainable Development Goals (SDGs) and the recommendations of the TCFD. Both of these will require companies to have access to more forward-looking data and analytical tools to measure where and when climate risks and natural capital impacts occur within their value chain and to capitalize on the new opportunities this brings.
Better information is the key to managing risk and uncertainty. Governments have stepped up to the climate change challenge by ensuring that there is a rulebook (created last year at COP24, the 2018 U.N. Climate Change Conference) to define how they will measure and report on climate impacts. This will ensure consistent and comparable reporting on carbon reduction plans by nations across the world.
Companies will need to be prepared to analyze the impact of these reduction plans on their operations, supply chains and products. Carbon pricing is among a number of mechanisms available to governments to incentivize the reduction of emissions. Research by Trucost shows the potential impact of increasing carbon prices on companies, which is material in many cases. Carbon prices will need to reach $120 per metric ton by 2030 to achieve the Paris Agreement goal, according to one scenario compiled using the Trucost Carbon Pricing tool. During this transition period, companies will need to understand how the intricacies of diverse carbon pricing policies could affect their operations, revenues and supply chains. They’ll also need to make use of forward-looking data and analytical tools to assess carbon pricing risk under a variety of scenarios, and in different sectors and regions.
The financial community is mobilizing. The TCFD is supported by eight of the 10 largest asset managers, three-quarters of the global systemically important banks, all the major credit rating agencies and many large pension funds. Investors increasingly want to understand how companies are using future carbon pricing scenarios to mitigate risk and direct capital to innovations that will succeed in the transition to a low-carbon economy.
As a result, 2019 is likely to be a year of increased activism by shareholders — an opportunity for leading companies to proactively engage their shareholders and the financial community at large.
This blog introduces the annual State of Green Business report published by GreenBiz and Trucost.