Disclosures regarding the climate are the trendiest trend in corporate reporting. The Task Force on Climate-related Financial Disclosures (TCFD) has sparked a movement that has attracted the backing of over 3,400 businesses and persuaded legislators in the United States, Canada, the United Kingdom, the European Union, and others to demand climate reporting.
The difficulty is ensuring that these climate disclosures provide investors and other stakeholders with decision-useful information. Currently, there is a patchwork of frameworks, standards, and rules dictating what climate-related information businesses must report and how it must be structured. Despite the fact that many of these recommendations and standards may be traced back to the TCFD, not all of them coincide precisely. Moreover, in nations where climate reporting is not yet required, companies have extensive discretion in interpreting disclosure recommendations. The result is a plethora of climate reports that do not provide meaningful comparisons between organizations regarding the nature, number, and magnitude of climate threats and opportunities they face.
This is an issue since unstandardized and incomplete data make it more difficult for investors to appropriately price climate risks and uncover climate opportunities with high returns. It also allows dishonest actors to "greenwash" their activity by disclosing data that has been selectively selected.
Inaccurate climate reports are an issue for more than just investors. Ultimately, if the information organizations broadcast contains more noise than signal, the public risks being misinformed about the pace and scope of corporate efforts to limit climate change, as well as companies' attempts to prepare for the inevitable physical repercussions of a warmer planet. This may force policymakers to ease off on establishing legislation and providing capital to ensure the low-carbon transition progresses on schedule.
In order to assess and contrast the climate disclosures of businesses, stakeholders want a level playing field. This is a significant problem that has been entrusted primarily to international standard-setting groups, most notably the International Sustainability Standards Board (ISSB), which was established last year to develop a "global baseline" for sustainability- and climate-related disclosures. However, even if the ISSB is successful, there is no assurance that the "baseline" will be accepted universally. Individual jurisdictions will modify the criteria as they see proper, assuming they even make reference to them. Remember that the ISSB cannot force nations to adopt its concept of how climate disclosures should appear.
If stakeholders desire a level playing field, they must put up the necessary effort. Here are four strategies for addressing this difficulty:
1. Cut through the confusion
In company climate reports, stakeholders must tone out irrelevant material and focus on critical signals. But how can they distinguish the meaningful from the insignificant? The key is to categorize decision-useful climate information using a system applicable to all types of disclosures. A taxonomy of this caliber can determine which bits of information are essential for evaluating a company's climate-related risks and possibilities and which should be disregarded.
2. Evaluate optimal practices:
To compare various companies' disclosures, stakeholders must establish a standard. This requires them to identify organizations that demonstrate excellent practices for transparency. Stakeholders require a method for evaluating the quality of each decision-useful disclosure, which might disclose the extent to which climate issues are considered by company executives. Methods must be standardized and applicable across industries and enterprises. Climate groups, non-profit organisations, and firms from the private sector are all attempting to create best practicesorganizations for disclosure. As a first step, their data can be used to establish a benchmark and begin ranking individual disclosures.
3. Establish a roadmap to climate competency
Once stakeholders are aware of how much decision-relevant climate information a firm is disclosing and how its disclosure methods compare to those of climate leaders, they may find it beneficial to learn how organizations might attain the standard for best practices. If a stakeholder is evaluating two organizations that fall short of the standard for different reasons and wants to determine which one to prioritize for engagement, knowing the exact activities the companies should take on could be helpful.
4. Remain in front of the curve
Disclosure regarding the climate is in its infancy, but it is evolving rapidly. This implies that tomorrow's best practices are likely to differ from those of today. Stakeholders must remain abreast of climate reporting trends in order to know when and how to revise their disclosure taxonomy and benchmarks for best practices.
These commonsense procedures can assist stakeholders in deciphering meaningful, comparable information on companies' climate disclosures and in making informed decisions regarding the nature, number, and magnitude of their climate risks and possibilities.