How to build resilience with better climate-related disclosures

The EY study highlights a few areas that boards can focus on in driving more robust climate risk disclosures.

Drive greater transparency on leadership oversight 

The board’s responsibility for monitoring and managing material environmental, social and governance issues is a core principle and mandated under the Singapore Exchange sustainability reporting rules. By extension, where climate change is identified as material to the business, disclosures in board statements should include specific actions that the board has taken to consider climate-related risks and opportunities as part of its strategy formulation, and how it oversees the management and monitoring of these factors.

Yet few companies are disclosing board or senior management oversight of climate risks and opportunities. The average coverage score for governance disclosures in Singapore is only 32% — the lowest among disclosures on the aforementioned four core elements of the TCFD recommendations. Even fewer delineate the board’s and management’s roles and their interaction on climate-related issues.

Apply climate scenario planning 

Under the strategy category of the TCFD recommendations, companies should describe three areas: climate-related risks and opportunities faced; their impact on the organization’s business, strategy and financial planning; and the resilience of the organization’s strategy. Singapore companies’ disclosures on strategy are subpar — only 20% of those analyzed in the study cover all three areas, while the average quality score in this aspect is only 15%.

Notably, many companies limited their disclosures to climate risks, without considering climate-related opportunities. Disclosures on the resilience of their strategy to climate impact also appear to be lacking. This could be because companies are underutilizing structured approaches like scenario analysis to assess the resilience of future strategic trajectories. In fact, only 17% of the assessed companies perform scenario analysis. Considering that scenario analysis helps turn theories into tangible strategies and is perhaps the most critical aspect of the TCFD framework, the board should steer the management to address this gap more proactively.

To do so, companies must understand the relative size and time frame of physical and transition risks in their geography and industry. They also need to construct worst-case, best-case and most-likely case scenarios, while considering the regulatory and market assumptions across different time horizons. As the environment is always evolving, scenario analyses must be updated whenever significant assumptions change. 

View climate risks holistically 

Nearly half of the companies analyzed disclose their practices in identifying, assessing and managing climate risks. However, their climate risk assessments are mostly limited to certain parts of the business and only include qualitative analysis. Also, less than a third of the companies disclose how climate risks are integrated into the company’s enterprise risk management system.

Climate-related risk management must be clearly linked to the company’s overall risk management processes. For example, climate risks should be recorded in an enterprise-wide database or included in the agenda of firm-wide risk reporting meetings. Risk management disclosures should elaborate on the frequency and methods of assessment of climate-related risks by the senior management and board.

It is not just in risk management that companies need to take a holistic view. They should also focus on accelerating decarbonization across their value chains. The findings show alarmingly that few companies consider their climate-related supply chain impacts, even though the TCFD recommends that Scope 3 emissions —  emissions up and down the value chain — should be measured and reported if appropriate. Businesses need to go beyond emissions from their own operations (Scope 1 and Scope 2) in pursuing decarbonization, considering that supply chain emissions are, on average, 11.4 times higher than operational emissions.1 The board should assess if the business is deploying decarbonization strategies across the whole value chain, including proactively involving supply chain partners in the efforts.

Charting a road map for action 

With the net-zero transition gaining momentum, Singapore companies need to act now to accelerate their decarbonization journey and improve their climate risk disclosures. How can the board guide the business to create a strategic climate action road map? 

Step 1: Understand and assess the impact of climate change on the business

Companies should first identify where their material exposure to climate risks and opportunities lies. Mapping out their entire value chain and analyzing their carbon footprint to identify emission hot spots is important. So is performing scenario modeling to stress test the business and quantify the financial consequences of material climate risks and opportunities.

Step 2: Develop and implement a clear climate strategy 

After defining their carbon ambition targets, companies should develop a robust climate strategy that factors in global and local developments, stakeholder expectations as well as current tools, technologies and resources. Implementing processes to monitor this strategy and evaluate its effectiveness is crucial.

Step 3: Communicate decarbonization approach and performance 

Companies should provide timely and transparent disclosures — supported by clear carbon commitments — that allow stakeholders to fully understand and evaluate their climate strategy and performance.

Making quality climate risk disclosures doesn’t happen overnight. It will require changes to the organization’s governance and risk assessment processes as well as collaboration across the sustainability, risk, finance, operations and investor relations business functions. In fact, it may take several reporting cycles before an organization can generate invaluable information for stakeholders to help them make informed decisions. The earlier an enterprise embarks on its decarbonization journey, the better positioned it will be to engage with investors and shareholders on the climate-related impacts and opportunities for the business, ultimately building resilience and trust with its stakeholders. 

Boards should consider the following questions:

• What are the company’s vulnerabilities to climate change in the long run?
• Which parts of the business are most exposed to changes in carbon policies and targets?
• How can the company transform climate-related risks into long-term value?
• How does the organization identify, assess and manage climate risks and are these processes integrated into the company’s risk management framework?
• What are the emission hot spots in the company’s value chain and how can the business work more closely with its supply chain partners to involve them in its decarbonization journey?

A version of this article first appeared in the Q1 2022 issue of the SID Directors Bulletin published by the Singapore Institute of Directors.