Much of the corporate reporting on emissions reduction is short on detail about how targets will be achieved
- Many corporate financial statements do not specify clear trajectories towards climate-change targets
- Assumptions about technologies such as carbon capture and storage can lead to ambiguities in reporting
- Mandatory reporting on climate-change targets might not lead to progress
Most corporate boards continue to procrastinate on climate change and will be entitled to for a while yet. Even BP, responding to the Taskforce for Climate-Related Financial Disclosures (TCFD), provides little detail in its 2019 annual report on how it will cut carbon emissions – despite the highly praised net-zero 2050 goal it declared. The company avoids existing publicly available climate scenarios on global temperature increases or carbon pricing, and it is silent on its potential financial performance against them.
According to Mara Childress at the TCFD secretariat, such omissions and disparities diverge from the taskforce’s recommendations. But they are commonplace – including by corporate TCFD supporters who acknowledge climate change as a material risk. “Companies envisage scenarios that could happen in future but they don’t relate that back to their own businesses,” she says.
Likewise BP. The steep decline in carbon emissions associated with its aims would presumably rely partly on carbon capture, use and storage (CCUS), a technology that features in BP’s 2019 Energy Outlook.
According to the International Energy Agency (IEA), carbon emissions storage is essential, and needs to increase by a factor of 20 by 2030 to help meet global net-zero emissions goals for 2050 recommended by the Intergovernmental Panel on Climate Change (IPCC) in 2018. This achievement would align with the Paris climate agreement to keep global warming below 2°C.
TCFD disclosure recommendations
● Governance: board oversight of climate-related risks and opportunities, and management role in assessing and managing them.
● Strategy: climate-related risks and opportunities an organisation has identified over the short, medium and long term, as well as impacts of climate-related risks and opportunities on organisation’s businesses, strategy and financial planning. Describe resilience of organisation’s strategy, accounting for different climate-related scenarios, including 2°C or lower.
● Risk management: processes for identifying, assessing and managing climate-related risks, and how these are integrated into organisation’s overall risk management. Metrics/targets used by organisation to assess and manage relevant climate-related risks and opportunities in line with risk-management strategy.
By committing to the technology alongside renewable energy, BP could play its part in depressing the emissions curve further towards the Paris targets, prompting reciprocal adjustments to IEA scenarios. Its partnership with Net Zero Teesside, an oil and gas industry CCUS project, shows serious intent, but nowhere in its annual report does it outline action to deploy CCUS.
Discussing Net Zero Teesside, BP reveals a minimum of five years before start-up. “The project, which is undergoing a feasibility study, could be in operation by the mid-2020s,” it states, which suggests it either lacks control of the outcomes or fully developed project schedules.
Uncertainty or evasion?
Such mists hover over many corporate statements, partly owing to the time lag between business reporting concerning the current financial year, and longer-term future investments. Environment, social and governance (ESG) analysts point out that many companies omit those long-term trajectories while also ignoring the current implications of future financial or environmental scenarios. For years, this has provided an opportunity to equivocate about innovative capital-intensive technologies such as CCUS. Where scenarios are developed, as advised by TCFD, assumptions are not always stated. Inputs to scenarios, such as views on energy pricing, are not declared.
This is unhelpful and does not match TCFD guidance, says Emine Isciel, head of climate and environment at Oslo-based Storebrand Asset Management. “Companies consider risks and opportunities in the short to medium term but that is not in alignment with the long-term horizons of 30 years implied by the Paris Agreement and recommended by TCFD.”
At the same time, potential investments might shift from one strategy area to another. “CCUS tends to be more reported as an opportunity,” says Isciel, since it can be used to justify ‘business as usual’ by promising a rosier, cleaner future. But if carbon abatement is imposed by government, the existence of CCUS can be considered a risk, adding to capital expenditure and reducing profitability.
By providing vague sketches, companies are not breaking reporting rules, of course. Currently a voluntary project except in New Zealand, the TCFD advises a level of detail not required by company law and accountancy standards. As a consequence, many companies avoid TCFD disclosures.
Under existing disclosure rules, senior management has to report on action to mitigate stated material risk but has the option not to declare particular risks as material. If it is proved mistaken, though, consequences could be severe. But the onset of risk materiality might not be clear in a given year, leading to ambiguities and delays in company climate-risk reporting. Alan McGill, global head of sustainability reporting and assurance at PricewaterhouseCoopers, explains: “The principal risks disclosed are those management believes that year to be material. But do company directors also perceive an emerging risk that may not be material in that year? The question is when the point is triggered at which that becomes a material risk.”
Mandatory TCFD reporting, as proposed for corporations in the EU’s revised Non-Financial Reporting Directive, would help answer more of the queries preoccupying ESG investors because it will demand more insights from every company. McGill says: “Companies will have to make the TCFD disclosures, and those disclosures will tell you whether the climate risk is material or not.”
However, such rules are unlikely to override the freedoms enjoyed by senior management to choose what they disclose. TCFD does, though, break new ground in accounting, he says. “The vast majority of financial reporting is historic. TCFD encourages management to look ahead by using scenarios as to how climate change impacts the company, and to quantify that future-orientated view financially.”
Some of the financial data currently absent might become available if TCFD becomes mandatory. However, TCFD does not compel decision-making due to its risk-based focus. Statements on transition risk, which covers issues like potential legislation, encourage companies to pass on responsibility to others. Hence, a few leading ESG investment managers aim to push the needle forward immediately, and NGOs such as Carbon Tracker have raised concerns.
Step up the pace
Steve Waygood, chief responsible investment officer at Aviva Investors and a member of the Financial Stability Board Taskforce on TCFD, says swift change is required. “I’m strongly supportive of the TCFD framework but it needs to be considered in the context of the pace and change needed,” he says. He points out that TCFD is not in itself a net-zero emissions commitment. “It does not say that management should take scenarios and commit to manage the business towards them.” Moreover, the TCFD launch preceded the official IPCC policy position on net-zero.
If climate-risk disclosures become mandatory, the new information generated might not stimulate progress quickly enough. Waygood says TCFD development needs to be complemented by further shareholder activism. This will include scrutinising company compliance with requirements to disclose according to TCFD or explain why they are not.
“We will vote against a company’s report and accounts if TCFD statements are found to contain material omissions, or if its explanation for not reporting on TCFD is found wanting,” he says, drawing parallels with the record of voting on director remuneration. “TCFD engagement needs to apply the lessons learnt on corporate governance and boardroom pay through routine voting at AGMs.”
In the meantime it is hoped that those companies which, like BP, have committed to net-zero, will go forward with a steady feed of useful information.
Following its annual report in March, BP stated in August that it would cut carbon emissions in upstream oil and gas by 35-40% by 2030. Hopefully its next annual report will publish specific measures showing how this will be delivered.
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