Only half of climate disclosures useful, review finds

Many climate-related disclosures do not cover the elements required to be considered decision-useful, a major review has found. While two-thirds had some alignment with recommendations issued by the Taskforce on Climate-related Financial Disclosures (TCFD), the study shows that only 49% of disclosures were of use to market participants in assessing and pricing climate risks.

The review, conducted by climate risk service provider Manifest Climate, used machine learning and natural language processing to assess the alignment of corporate climate reporting with TCFD recommendations. A second model based on the specific elements of each recommendation was then run on a sample of 117 disclosures to assess the usefulness of the reported information. The exercise examined disclosures of over 3,000 companies in 65 countries during the period 2018 to 2021.

Over half of the disclosures reviewed contained information on the organisation’s climate-related risks and opportunities, the study found, and 39% offered details of climate-related metrics such as emissions. However, only 4% of reporting companies revealed how they would integrate climate considerations into their overall risk management practices, and only 6% reported on the resilience of their climate strategy.

The banking and utilities sectors showed most alignment with TCFD, while technology and healthcare showed the least. Decision-useful information on metrics and targets was present in only 41% of financial service company disclosures.

A second recent analysis from financial thinktank Carbon Tracker presents similar results. Comparing the financial statements of 134 high-carbon companies against the Climate Action 100+ accounting methodology, the study found that over 70% of reviewed companies and 80% of auditors failed to disclose climate-related risks in their financial statements.

“In general, companies failed to disclose the relevant quantitative climate-related assumptions and estimates used to prepare the financial statements, even when they indicated that climate risks may impact these assumptions,” the Carbon Tracker report said. Companies also did not present consistent climate narratives, it found.

Although a “significant majority” of companies had targets or ambitions to achieve the Paris-aligned target of net zero by 2050, none of the companies examined used assumptions and estimates that were aligned with that goal.

A 2021 report from the Network for Greening the Financial System (NGFS) on bridging data gaps found that, while reliable and comparable climate-related data are crucial for financial sector stakeholders to assess financial stability risks, there are “persistent gaps” in the information available.

A follow-up report published earlier this year reviewed new initiatives to improve data availability and quality, offering three core recommendations for improvement: convergence towards a common and consistent set of global disclosure standards; cooperation and coordination to develop mutually shared principles for taxonomies and sustainable finance classifications; and harmonisation of “well-defined and decision-useful” forward-looking metrics.

The NGFS has also launched a directory of climate-related data sources based on the needs of financial-sector use cases.