Many UK companies will be required to make statements about the risks of climate change to their businesses under new proposals offered by the Financial Conduct Authority (FCA). Supposedly “premium side“Companies that meet the highest regulatory standards are already required to make such statements in their financial reports starting this year, but the FCA now wants to extend them to most other listed companies by 2023 (and to other financial organizations such as asset managers).
This will require UK companies to report on business risks such as more frequent and extreme weather events, rising temperatures and rising sea levels – in line with recommendations from the international Climate-Related Financial Reporting Working Group (TCFD).
A number of companies around the world are already following these requirements, while G7 finance ministers recently engaged himself make the declaration of climate risks compulsory for companies registered in their country. In the United States, for example, a debate is now underway on what form these disclosures should take and whether companies should be legally responsible for their assessments.
All of this reflects the fact that political discussions around the world in 2020 and 2021 have been dominated by severe risks from climate change – and future pandemics as well. The main accounting and other bodies are push for companies to disclose the risks associated with the United Nations Sustainable Development Goals, which means pandemics as well as climate change.
There has already been a displacement of investments Favoring companies that deal with such risks and making risk reporting mandatory in company disclosures is crucial for this trend to continue.
Yet, for now at least, most companies continue to report on these risks at their own discretion. Our newly published research shows the scale of the challenge. We’ve looked at all of the publicly available information from the world’s ten largest airlines and the five largest hotel and cruise lines. Many are household names, and they are among the most threatened by pandemic and climate risks in the world. Here is what we found.
Lack of disclosure
We looked at corporate disclosures in the months leading up to the pandemic. These included annual reports, sustainability reports, websites, stock quotes and disclosures under the CDP (Carbon Disclosure Project) global environmental impact reporting system.
These risks concern the present as well as the future. Holidaymakers are already faced with climatic effects such as less snow in some ski resorts, floods, Forest fires, heat waves and other extreme weather conditions events. Loss of biodiversity is making some destinations less popular, including Australia Great Barrier Reef. And before the coronavirus, airlines and hotel companies had already known substantial economic costs of Sars and Mers.
Yet only six of our 20 companies treated pandemics as a separate risk category in their disclosures. Others spoke of the lower risks of epidemics and disease outbreaks, but often did not explain how their business operations and profits could be affected.
A cruise line had listed the control of disease transmission on board and the protection of employees as its only risks related to the pandemic. Greater risks of reduced passenger demand, road closures, and disruption to operations and supply chains were not mentioned. Few airlines and hotels have discussed it either.
Meanwhile, only four companies have explained strategies to mitigate risks from the pandemic. These were limited to ensuring that you had disaster recovery and business continuity plans.
Disease risks identified by companies
Our 20 companies have shown only a slight increase in awareness of the business risks associated with climate change. Five of them – including four airlines – did not reveal any potential risk. Among those who disclosed risks, the focus was on reducing fuel or energy consumption and carbon emissions – reflecting increased regulatory risk and pressure from stakeholders to reduce emissions.
But other risks such as customers’ shift to “greener” alternatives or extreme weather conditions were generally not recognized. Strategies to deal with the long-term effects of climate risks have also been rarely considered.
Companies and their climate risk strategies
These limited disclosures show how much the airlines and hospitality industry need to change in order for climate and pandemic risks to be addressed appropriately. And if we consider that these companies are among the most threatened, other sectors could well be even more threatened.
The IFRS problem
Another difficulty in this area concerns the IFRS Foundation, which publishes international financial reporting standards that must be followed in some 140 countries, including the United Kingdom (but not the United States). The foundation recently published a proposed practice statement on management commentary, which addresses how companies should disclose factors that could affect their cash flow and value.
In their management commentary, companies can incorporate all mandatory risk reporting requirements such as those offered in the UK, or choose to follow recommendations like those of the TCFD if they are based in a country with more rules. flexible. Unfortunately, the IFRS proposals are not entirely useful in encouraging companies to provide such information.
The proposals require that risks be disclosed only to the extent that they affect the “enterprise value” and future cash flows of a company from an “investor” perspective. It goes against efforts during the last decade encourage companies to think about the value they create for society and their impact on the environment – including the European Commission Directive on Corporate Sustainability Reporting.
The problem is that systemic risks such as climate change are impossible to quantify in monetary terms, especially with respect to a particular date in the future. Trying to do this is both time consuming and largely futile. Our research indicates that businesses are likely to minimize or ignore risks that cannot be easily translated into financial costs or that may take more than, say, five years to materialize.
When identifying risks, companies should also consider their effect on the long-term value of society and the environment – and not just on the value of the business as proposed by the IFRS Foundation. As countries put more and more requirements in place for companies reporting such risks, they also need to make this issue part of their agenda.