Why the consumer goods and health sector lags on climate disclosures

Poor quality and coverage of climate-related disclosures highlight the limited engagement by the retail, health and consumer goods sector.

In brief

• The retail, health and consumer goods sector has one of the lowest scores for both coverage and quality of climate-related financial disclosures.
• The top performing companies in the sector are typically from markets within Europe.

Although not identified in the Task Force on Climate-related Financial Disclosures (TCFD) recommendations as a key sector, the retail, health and consumer goods sector was analyzed as part of the 2019 EY Global Climate Risk Disclosure Barometer report because of its economic importance. In this analysis of the retail, health and consumer goods sector, health included pharmaceuticals, health care and medical services. Each of the companies that were analyzed by EY received a score for the coverage and quality metrics on the basis of how they addressed or implemented each of the 11 recommendations by the TCFD.

Collectively, companies in the retail, health and consumer goods sector were among the lowest performers of all the sectors assessed by EY. On average, companies covered less than half of the 11 TCFD recommendations and the majority of disclosures were focused on the targets and metrics area, with risk management disclosures being the least covered.

The overall quality of disclosures was low and showed a need for improvement, with the targets and metrics area showing the highest level of quality (of the information disclosed) and strategy areas the lowest.

The leading markets were mostly in Europe and included Spain, France, Germany and the UK. The markets not performing as well included the Philippines, China (Mainland), Hong Kong, Kazakhstan and Russia, which typically did not cover any of the recommendations.

EY teams analyzed how the retail, health and consumer goods sector performed against the four areas, through which the TCFD recommendations are structured.

Governance

In the analysis, the most commonly adopted TCFD governance areas in this sector was related to management’s role in assessing and dealing with climate-related risks and opportunities. Generally, disclosures comprised of high-level discussions about the role of management around sustainability. However, climate was only one element among other corporate sustainability topics. In addition, most companies did not provide a detailed description of the board’s responsibility over climate-related risks and opportunities.

Top-performing companies were usually from markets with an increased maturity of legislation, such as France, the UK and Australia. Companies in these markets reported detailed information relative to the integration of climate-related risks in their corporate governance structure at both the board and management levels. This information included the composition of the board, interaction between committees and management, the frequency of meetings, and how climate-related risks and opportunities were linked to the overall business strategy and business model.

Some of the best governance practices included the implementation of management committees (e.g., sustainability and corporate social responsibility (CSR) committees) responsible for overseeing climate topics. Communication and board oversight with these committees was often through a direct reporting line or board member participation in the committee.

Strategy

In the analysis, the most commonly adopted strategy recommendation within this sector was the disclosure of climate-related risks and opportunities, and their time horizons. It is worth noting that risks were given more attention than opportunities in the majority of disclosures.

Climate-related risks disclosed in the sustainability or annual reports EY analyzed, often broadly identified some physical risks by mentioning supply chain disruptions due to acute and chronic weather patterns. However, the opportunities (e.g., resource efficiency projects and the shift in consumers’ behaviour) were often less detailed in their disclosures.

Detailed risks and opportunities were mostly disclosed through the companies’ responses to Carbon Disclosure Project (CDP), in which the most common climate-related risks reported were transition risks — such as increased greenhouse gas (GHG) prices and other costs related to a transition to a low-carbon economy.

Most companies assessed did not provide a detailed description of their resilience under different climate scenarios. Likewise, most did not provide detailed information on the use of climate scenarios as well.

Less than 10% of the companies assessed had implemented climate scenarios and only one of these companies had aligned to the TCFD recommendation to use a set of climate scenarios. For example, the company had aligned to a 2°C or lower scenario in addition to two or three other scenarios which were relevant.

Risk management

In the analysis, most commonly adopted of the TCFD recommendations on risk management were the processes for identifying and assessing climate-related risks. Many companies disclosed the identification and assessment process at both a business and asset level, as well as the risk assessment frequency and assessment time horizon. However, most companies did not describe how processes for identifying, assessing and managing climate-related risks were integrated into the organization’s overall risk management.

Targets and metrics

The disclosure of GHG emissions was the most commonly adopted TCFD recommendation in the analysis, but less than half of those companies assessed disclosed their Scope 1, 2 and 3 GHG emissions. Companies from markets with low scores, such as China (Mainland), Hong Kong, the Philippines and Russia, did not disclose any information on their GHG emissions. Also, most companies did not provide other metrics used to assess climate-related risks and opportunities other than GHG emissions.