How will climate transition planning empower you to shape the future?

Overall, the Barometer suggests a troubling lack of urgency on the part of companies when it comes to taking action that combats the climate crisis. Nevertheless, the research did indicate some progress on climate disclosures, which has largely been driven by regulatory developments.

Leaders and laggards

Improved quality of climate disclosures is noticeable in jurisdictions with strong climate reporting regulations, specifically the UK (which has a quality score of 69%) and the EU overall (which has a quality score of 60%). Companies in the UK and EU are also most likely to have a transition plan. While development in these markets is positive, limited improvement in India, the US and China is worrying given their shares of global emissions: according to the Global Carbon Budget (2023) and Our World in Data organisation, China (30.7%), USA (13.6%) and India (7.6%) accounted for 52% of the global annual CO2 emissions in 2022. (CO₂ emissions - Our World in Data).

The Middle East, Southeast Asia and India remain relative laggards on both disclosure quality and coverage compared with other jurisdictions, and although all three markets have seen their reporting quality improve by more than 20% since last year’s study they are still lagging the global average quality score which stands at 54%. Companies are increasingly choosing to report, albeit not at the scale needed, to meet the expectations of stakeholders who want them to act on climate issues and better integrate sustainability into their strategy and operations. For a detailed breakdown by country and markets see the full report.

ISSB readiness

The voluntary standards of the International Sustainability Standards Board (ISSB) are now in effect, and a number of jurisdictions have confirmed they plan to adopt the framework. In turn, the percentage of companies surveyed this year that are disclosing against the recommendations of IFRS S2 Climate-related Disclosures rose markedly.

The highest average scores for ISSB readiness were secured by Taiwan and the UK (both at 68%), reflecting the speed and decisiveness of those jurisdictions in relation to formal adoption of the ISSB framework.

Sector focus

The Barometer recorded significant year-on-year improvements in disclosure quality in mining, banking and transportation - sectors that are all heavily exposed to transition risk. Yet the highest quality score overall belongs to the energy and insurance sectors (59%). These low scores, however, show that that even the highest-performing sectors fail to deliver at the speed and scale of improvement needed.

*Financial Sector **Non-Financial Sector

¹ These sectors are not part of TCFD sector classification, however, were identified as High-Risk sectors by sector leads in 2021 study

Energy’s high score for disclosure quality reflects the sector’s exposure to transition risk as well as its role as an enabler of decarbonisation for other sectors. Still, less than half (43%) of the energy companies assessed for the Barometer had disclosed a transition plan, possibly for competitiveness-related reasons, while just 24% disclosed the quantifiable impacts of climate on their business.

The insurance sector’s healthy quality score reflects several factors: the rise of mandatory climate reporting; pressure from investors who expect the insurance companies to provide more  transparent, robust and detailed disclosures around their climate-related metrics; and, as corporate clients improve the quality of their disclosures, the availability of higher-quality data that banks and insurers can use to inform their decision-making and improve their own disclosures. However, banks and insurers are less likely than many other sectors to produce a transition plan. The Barometer found that 37% of banks and 36% of insurers had a transition plan, lower than the cross-sector score of 41%.

The level of transition planning being undertaken by companies highlights their struggles to identify decarbonisation levers and commit to the action plans needed to achieve their climate goals. Just 41% of companies assessed this year said they had a transition plan, while 21% do not yet have a plan but have disclosed ambitions to put one in place.

Perhaps expectedly, companies that do have transition plans generally have a higher quality of climate disclosures.

Companies’ lack of action on transition is incongruent with the scale of their ambition on the climate agenda. Analysis of disclosures in relation to transition planning shows that the vast majority of the companies assessed (83%) have set short-term targets, aiming to achieve those targets by 2030.

Transition planning: a regional snapshot

Transition planning: a sector snapshot

The importance of setting a target

Targets are critical for accelerating the transition to a net-zero economy. When companies set targets, they are indicating that they intend to take strong climate action that is aligned with achieving the goals of the 2015 Paris Agreement and limiting global warming to 1.5°C above pre-industrial levels. Targets that have been validated by the Science Based Targets initiative (SBTi) are considered best practice because they set specific timelines for the rate at which companies must decarbonise to prevent the worst impacts of climate change.

Notably, just 24% of companies assessed for the Barometer have their short- and long-term targets validated by the SBTi, although this figure climbs to 41% of companies with an established transition plan. Companies could therefore do much more to align their target-setting with the science around climate change.

Overall, 78% of the companies assessed disclosed the scope of emissions considered in their targets. Half (50%) considered all three Scopes in their targets while 21% considered Scopes 1 and 2 only. In terms of their decarbonisation strategies, companies are prioritising reductions in Scope 2 emissions. Many of these reductions relate to reducing electricity consumption but the majority are indirect impacts through purchasing renewable energy via power purchase agreements or renewable energy certificates. The Barometer shows that companies are investing less in initiatives targeted at Scope 1 and Scope 3 emissions. This is a concern since Scope 3 emissions often represent the majority of an organisation's total greenhouse gas emissions, and reductions in these emissions are essential for companies to genuinely decarbonise their business models.

The Barometer shows that despite improved levels of climate disclosures across the markets and sectors, even companies with ambitious targets approved by the SBTi do not have detailed strategies to reach the target goals and develop transition plans that drive real-world action. Certainly, they face some genuine barriers to transition, including the pressure to balance profitability with achieving their carbon ambitions, practical challenges in addressing Scope 1 and Scope 3 emissions, and the unavailability and expense of low-carbon technology. Nevertheless, the transition to a net-zero economy will likely not happen without ambitious and meaningful action.

Companies should take these six core actions to accelerate their sustainability transition and shape the future:

1. Move transition to the core of the business agenda by developing a robust, actionable plan. This should be founded on science-based targets and outline clear short- and long-term targets for Scope 1, 2 and 3 emissions. It should be informed by robust scenario analysis and feature a clear decarbonisation strategy for the supply chain.
   
   
2. Reflect climate risk in the financial statements and explore potential opportunities. Companies should adopt quantitative analysis to measure the risks and opportunities associated with climate change, ensuring a direct connection to financial reporting. As well as quantifying the financial risk associated with climate transition, companies should explore potential opportunities such as new business models, a shift to new ways of working, or access to grants and incentives.
   
   
3. Use data to drive action. By capturing the right data in the right way, companies can use their sustainability information to inform real-time decision-making. For example, if companies are reporting comprehensively on the TCFD pillars, they can use the information to better prepare themselves for future climate challenges. Likewise, reporting on GHG emissions can help them in setting a target to reach net zero, and disclosing on strategy pillars can help them in devising ways to mitigate climate risks, plus putting a proper governance structure in place can help in embedding climate policies within an organisation, etc.  This will enable companies to better anticipate and respond to market risks and opportunities.
   
   
4. Provide the sustainability team with sufficient resources. The sustainability team needs the capacity to manage compliance while also leading on overall sustainability strategy and undertaking thoughtful work in vital areas such as climate risk analysis. Equally crucial is the strategic alignment, which can be achieved by positioning the sustainability function under the chief financial officer (CFO) or making sure that sustainability is embedded in each role within different business units.
   
   
5. Equip board members with the skills to understand and consider climate risk as part of a top-down approach. This can be achieved through training and education and by recruiting board members with specialist knowledge. Companies also need to link sustainability performance with executive compensation to incentivise executives to prioritise and achieve their climate-related goals, integrating them into strategic decision-making and daily operations. The 2023 EY Sustainable Value Study highlights how boards can drive delivery on sustainability ambitions by focusing on the dynamics of key executive roles and five strategic areas.
   
   
6. Explore cross-sector collaboration. By looking outside of their immediate ecosystems of suppliers and partners, businesses can create value in often unique ways, benefiting multiple stakeholders. As governments and the public sector are essential in driving progress towards net-zero targets, businesses could proactively align with regulatory frameworks, engage in public-private partnerships, promote transparency in monitoring and advocate for sustainable policies.

Summary

The sixth edition of the 2024 EY Global Climate Action Barometer clearly shows that the state of climate-related disclosures is nowhere near where it needs to be to effectively address the accelerating climate crisis. Companies across the world need to urgently improve the quality of their climate disclosures. In particular, they must increase their adoption of transition plans, better connect the results of their scenario analysis with their financial information, and set scientifically validated targets for the short, medium, and long term.