Climate risk disclosure shows deficiencies

Sustainability reports reveal a gap between affected companies and those whose boards say they are addressing climate risks, the OECD has found.

The number of boards overseeing climate risk is likely to be lower than the number considering climate change to be a “financially material” issue, according to a developed economy think tank.

The Organization for Economic Co-operation and Development (OECD) has revealed that 53% of companies by global market capitalization say their boards are sensitive to climate risks. However, the number of companies responding that climate change is a significant risk reaches 64%.

The OECD said this “suggests the need for more boards to consider climate-related risks when considering, monitoring and guiding each company's governance practices, disclosures, strategy, risk management and internal control subsystems.” It is possible that this is the case.''

As sustainability reporting obligations tighten around the world, the OECD report sheds light on global disclosure efforts.

The report's headline news is that 86% of companies by global market capitalization publish some form of sustainability report. However, this is only 9,600 out of more than 47,000 listed companies worldwide.

More companies report on sustainability issues in Europe than anywhere else in the world. Europe is closely followed by the United States, followed by Latin America.

force majeure

Both Europe and the United States have introduced major new legislation mandating sustainability reporting. In Europe, both the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive introduce extensive new responsibilities for reporting their impacts.

The United States has just given the green light to highly controversial new climate risk reporting rules.

Meanwhile, regulators around the world are considering whether to implement new sustainability reporting standards issued by the International Financial Reporting Standards Foundation (IFRS) regulator.

However, while there has been a strike on sustainability reporting, little progress has been made in providing assurance on the information disclosed.

The OECD states that “reasonable” assurance of sustainability disclosures is relatively rare worldwide. In terms of market capitalization, Asia excluding Japan and China leads the way, with Europe not far behind.

This figure supports one of the OECD's key policy recommendations: “Regulators in jurisdictions where voluntary assurance is common practice should require large publicly traded companies to provide assurance on sustainability-related information.'' “There is a possibility that we may consider requesting acquisition.”

In the absence of general guarantees, some jurisdictions should consider mandatory guarantees for “specific” disclosures such as greenhouse gas emissions, the OECD said.

Sustainability reporting is still a work in progress around the world. Stronger board oversight and stronger assurance will drive improvements.