EU and global policy-makers are forging ahead with recommendations on climate-related disclosures – what are the financial benefits?

This month the European Commission released its report on climate-related disclosures, which sets out the current progress being made by international groups advocating more clarity and detail on climate-related matters in corporate statements.

The report was prepared by the Commission's technical expert group (TEG) on sustainable finance, a group of 35+ experts from diverse backgrounds, who are working on developing four key areas:

• a unified classification system for sustainable economic activities,
• an EU green bond standard,
• benchmarks for low-carbon investment strategies, and
• guidance to improve corporate disclosure of climate-related information.

The work being done on climate-related disclosures is part of the Commission's strategy to deepen the connection between finance and sustainability, under its Action Plan on Financing Sustainable Growth. Part of the strategy is to revise guidelines for the Non-Financial Reporting Directive (NFRD), which governs disclosure of environmental, social and governance-related information. The guidelines will be in line with the recommendations of the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD).

The TEG's report notes that the transition to a low-carbon, sustainable economy means that some industries will need support as their operating models change. But this will mean more investment and specifically, an extra sum of private capital to the tune of €180 billion will be needed to meet the EU’s energy and climate targets by 2030 (and even more investment will be needed to achieve climate neutrality by 2050).

So how can large corporates benefit from this push towards climate-related disclosures? The report spells out several ways in which firms will gain: “The disclosure process can lead to increased awareness and understanding of climate-related risks and opportunities within the company, better risk management, and more informed strategic planning. Good climate-related disclosure that reflects strong governance and strategy on issues related to climate change can contribute to securing a lower cost of capital and a more diverse investor base.”

In particular, it outlines these potential benefits for listed companies:

• Better understanding of the exposure of a company’s operations to physical and transition risks related to climate change.
• Inclusion in actively managed investment portfolios and in sustainability-focused indices, used for passive investment strategies.
• Climate-related disclosures used to improve credit ratings for bond issuance and credit worthiness assessment for bank loans.
• Reduced friction in investor engagement and shareholder action and voting.

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CTMfile take: This subject is hugely important for corporate treasurers and CFOs. For more detail, read the whole report here.