Why manufacturing is setting the bar for climate-related disclosures

Manufacturing companies continue to improve climate-related disclosures with more detailed approaches to incorporating scenario planning.

In brief

• The majority of manufacturing companies score highly for coverage of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
• Within the manufacturing sector, markets with large and leading technology firms, such as the US and South Korea score significantly above the sector’s average.
• Most companies are beginning to provide information on their approach to incorporating scenario planning as part of their climate strategy development.

Analysis of the 2019 EY Global Climate Risk Disclosure Barometer showed that the majority of manufacturing companies (this includes manufacturers of chemical products, industrial products and consumer products), scored the highest for the coverage of Task Force on Climate-related Financial Disclosures (TCFD) recommendations, with just over half of the assessed companies achieving a score above 80%. The average score for coverage was brought down by a significant subset of 22% of the companies that failed to report on any of the recommendations. Each of the manufacturers that were reviewed received a score for the coverage and quality metrics on the basis of how they addressed or implemented all of the 11 recommendations by the TCFD.

A small number of leading manufacturing companies, mainly from European markets, achieved quality scores above 80%. This is an increase when compared to the 2018 survey results, which found that only two manufacturers achieved scores above 80% and the remainder achieved scores below 60%. This reflects the fact that TCFD recommendations are beginning to be adopted into regulatory frameworks within the European Union (EU). However, most companies still scored well below 50% in terms of quality of their climate-related risk disclosures, indicating that they are still on a journey to develop and translate their climate strategy into coherent disclosures. In addition, markets with large and leading technology firms, such as the US and South Korea, received scores significantly above the sector’s average.

Also, when compared with 2018, more companies in this sector have begun to provide some information on their approach to incorporating scenario planning into their climate strategy development. This is likely driven by a combination of factors, including:

• The rise in energy prices across certain markets
• The increase in price of the European emission allowances for liable companies under the EU Emissions Trading System (EU ETS)
• The business and supply chain disruption due to physical risks
• The growing pressure from some of the largest companies who are gaining a better understanding of their Scope 3 emissions (which encompasses the operations of manufacturing) and setting ambitious emissions reduction targets  

Among the lowest-scoring manufacturers were those from emerging markets, such as Latin America, Asia and Russia, where the manufacturing sector operates within less regulatory frameworks.

We examined how the manufacturing sector performed against the four areas, through which the TCFD recommendations are structured. 

Governance

The majority of companies only provided high-level information on the governance structure, with regards to the oversight and management of sustainability aspects. A large number did not provide any specific reporting on the governance issues in relation to climate change.

Higher-scoring manufacturers offered a more detailed disclosure on the type and frequency of board-level engagement with climate-related questions and also have provided insights into the interaction between the board and management. This was particularly done by those manufacturers that had provided a detailed disclosure to Carbon Disclosure Project (CDP).

However, by reporting on structural and procedural governance aspects, most manufacturers failed to clearly articulate the relative importance of climate-related matters in terms of the overall business strategy. Companies also struggled to illustrate the extent to which oversight of climate issues informed corporate decision-making at board and management levels. Linking the description of the climate oversight processes to the vision of the overall business strategy and core business model presents a major and continued challenge for robust transparency in this context.

Strategy

Over half (51%) of the companies achieved a low score for quality (below 20%) in this area, with a significant segment failing to provide any information on climate strategy.

Among the higher-scoring companies were many CDP responders. These manufacturers used the reporting framework to detail specific climate-related risks together with an indication of the likelihood and magnitude of impact. However, despite the granularity of disclosures regarding the identification of specific climate-related risks and opportunities, many manufacturers still fell short and did not provide detailed insights into the organizational responses to address those impacts and the link to the overall business strategy.   

Some of the highest-scoring manufacturers published a stand-alone report on their climate strategy. These reports comprehensively articulated the relative materiality of climate factors to the business strategy as well as the company’s vision and management approach. 

When compared with 2018, more manufacturers have provided some information on their approach to incorporating scenario planning into their climate strategy development. Higher-scoring companies outlined the type of reference scenarios they used for assessing business resilience and also indicated, at least in general terms, how scenarios were used in decision-making at different levels of the organization. However, these companies failed to provide a detailed and quantified articulation and explanation on the organization's outlook (i.e., competitiveness and resilience) for the different climate-related scenarios. Overall, scenario assessment is an area where even leading manufacturing companies are still at the early stage of developing their approaches. 

Risk management

A majority of manufacturers (53%) from across both developing and emerging markets did not provide any disclosure on risk management processes in relation to climate change. Companies with basic reporting in this area commonly offered generic explanations of risk identification procedures, but no further insight into how risks were addressed.

Among the group of high performers (scoring above 60%), risk identification and management procedures were more detailed, with disclosures often being provided through the format followed by CDP. Leading manufacturers offered additional information on the relative significance of climate-related risks in relation to other risks, along with a prioritization of risks and opportunities.

The integration of climate risks into the overall organizational risk management framework was the weakest scoring aspect in this category. While many manufacturers had developed processes for identifying and managing climate risks, these were often not yet fully embedded in enterprise risk management systems. Some manufacturers illustrated this journey by highlighting collaborative activities of sustainability and risk experts to develop an integrated approach.      

Targets and metrics

Across all markets, disclosures for targets and metrics scored higher relative to other TCFD recommendations for both coverage and quality, reflecting the relative maturity of emissions reporting in the manufacturing sector.

However, almost a quarter of the manufacturers, largely from emerging markets, still did not provide any information on emission metrics and targets.

Commonly adopted reporting elements included Scope 1 and 2 emissions, as well as information on boundaries and methodology. Higher-scoring companies also tended to provide more comprehensive historical data and a breakdown of their Scope 3 emissions. However, they often lacked an explanation on Scope 3 boundaries.

About one-third (31%) of the manufacturing companies published some form of emissions target, in the form of an absolute or relative reduction, or both. Most of these manufacturers reported progress against targets. However, even manufacturers that scored higher typically failed to provide an adequate explanation on the strategy behind their targets or how these targets helped manage climate-related risks or opportunities.