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Financial risk from climate change ignored by majority of MNCs in annual reports

A minority of corporates are providing investors with adequate indications of value at risk from climate change and even fewer use quantification or scenario modelling to do so. These are the findings from a KPMG survey released this week, which found that almost three-quarters (72 per cent) of large and mid-cap companies worldwide do not include the financial risks of climate change in their annual financial reports. The Survey of Corporate Responsibility Reporting 2017 shows that very few of the companies (just 4 per cent) that acknowledge climate-related risk also provide investors with analysis of the potential business value at risk.

The survey looked at the annual financial reports and corporate responsibility reports of 4,900 companies in 49 countries (the top 100 by revenue in each country). There are only five countries where the majority of the top 100 companies mention climate-related financial risks in their financial reports. They are: Taiwan (88 per cent), France (76 per cent), South Africa (61 per cent), US (53 per cent) and Canada (52 per cent). In most cases, disclosure of climate-related risk is either mandated or encouraged in these countries by the government, stock exchange or financial regulator.

Firms should move quickly

KPMG's report also found that reporting of climate-related financial risk is more common among the world's 250 largest companies. For example, France-based multinationals companies (MNCs) lead with 90 per cent acknowledging climate-related risk, followed by MNCs headquartered in Germany (61 per cent) and the UK (60 per cent). However, only six of the 250 biggest companies have informed investors of the potential financial impact of climate risk through quantification or scenario modelling.

KPMG's José Luis Blasco, said: “Our findings support the need for initiatives like the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD) that aim to improve corporate disclosure of climate-related risk. Pressure on firms to up their game on disclosure is growing by the day. Some investors are already taking a hard line approach to demanding disclosure; some countries are considering regulation to mandate it; and some financial regulators have warned that failure to identify and manage climate risk is a breach of a board's fiduciary duty. In this context, we encourage firms to move quickly. Those that don't could very soon start to lose investors and find the cost of capital and insurance cover escalates quickly.”

Making the invisible, visible

However, the news is not all bad, as a report from research firm CDP, a non-profit company that drives companies and governments to reduce their carbon footprint, found that more MNCs are now putting a price on their use of carbon by factoring an internal carbon price into business plans. CDP has seen an eight-fold leap in take-up of internal carbon pricing strategies among large corporates in the last four years, with 1,400 companies now doing so, compared to just 150 companies in 2014. CDP's research shows that more than three-quarters of the energy and utilities sectors’ market cap is currently pricing carbon internally, including industry heavyweights such as National Grid, EDF, Exelon Corporation, PG&E Corporation and E.ON. Over half of the materials and telecommunications sectors also intend to use an internal carbon price as early as 2019.

CDP's Paul Simpson said: “Carbon pricing makes the invisible, visible. We’re seeing a significant rise over last year in the use of companies pricing their own carbon pollution in China, Mexico, Japan, Canada and the US. Changing regulation is working on a global scale and in all regions we are seeing many businesses fast track the low carbon transition into their business plans. The Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures' recommendations, Carbon Pricing Corridors, and Science Based Targets initiatives are driving greater transparency, information and governance. With this comes better management of risk and tracking of progress to a well below 2-degree world.”

CTMfile take: These two surveys show two aspects of the drive to reduce corporate carbon footprints. They show there is still a lot of work to do but they also highlight two things: firstly, making carbon a financial issue by adopting internal carbon pricing is effective in reducing a big company's carbon footprint and, secondly, obligatory disclosure of climate-related risk by governments and financial regulators is effective in getting companies to include such risks in their financial statements.

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