Businesses’ slow crawl on climate action jeopardizing global environmental goals

Executive Summary

The latest EY Global Climate Action Barometer shows just 41% of businesses have plans in place to manage climate risks; world’s biggest emitters are worst offenders; lack of action posing major threat to achievement of global goals

A vast majority of businesses have not made a financial commitment to prepare for net zero – only 4% have disclosed operational expenditure and just 17% have reported capital expenditure

Widespread global failure to set long-term commitments on greenhouse gas emissions; most businesses showing lax attitude to full range of emissions

A worldwide failure of businesses to put action plans and financial commitments in place to tackle climate change risks has derailed progress on vital global environmental goals, according to the latest EY 2024 Global Climate Action Barometer (Barometer).

Now in its sixth year, the Barometer looks at the extent to which organizations across the globe are reporting – and acting to mitigate – risks posed by climate change. It scrutinizes the efforts of more than 1,400 businesses in 51 countries, across 13 business sectors, by looking at their transition plans and the information they publish based on the 11 recommendations set by the Task Force on Climate-related Financial Disclosures (TCFD), which was established to improve and increase reporting of climate-related financial data.

The Barometer scores companies on the number of recommended disclosures that they make (coverage) and the detail they provide for each one (quality). It shows that the number of businesses providing at least some information on each of the recommended disclosures is at its highest point since the survey began. A score of 100% means information is being disclosed on all recommendations, and this year’s average score is 94% – an improvement in coverage, from 90% in 2023.

However, the quality of disclosures remains worryingly low. The average quality score sits at 54% – edging up just slightly from 50% last year, indicating that many companies are avoiding sharing detailed information with customers, investors and other stakeholders. A score of 100% indicates that all the details needed are being disclosed. Countries and regions with the highest quality disclosure records are the UK (69%), South Korea (62%), Japan (61%), Southern Europe (61%) and Western/Northern Europe (61%), while the Middle East (29%) sits at the bottom of the pack.

This latest Barometer throws into sharp relief companies’ lack of readiness to meet the crucial goals of the 2015 Paris Agreement – including targets to limit emissions and temperature increases and to strengthen their ability to adapt to the impacts of climate change. Only slightly more than two-fifths of companies (41%) report they have a transition plan in place to help them mitigate the risks of climate change, and while a little more than a fifth (21%) report they do intend to develop one in the future, 38% do not have any intention of doing so.

Among the world’s biggest emitters adoption of transition plans is even lower – only 8% in China and just 32% in the US. By way of contrast, adoption of these plans in UK and Europe is 66% and 59%, respectively – largely the result of successful regulatory regimes, underlying the importance of regulation as a means to drive action.

Compounding this problem, even fewer companies have made clear financial commitments to support their transition plans. Just 4% have disclosed operational expenditure (expenses arising from day-to-day business operations) and 17% have reported capital expenditure (money invested in a business’ assets for future gains) – a sign that, even where companies have action plans, they are not ready to execute them.

Dr. Matthew Bell, EY Global Climate Change and Sustainability Services Leader, says:

“Ambition without action is meaningless at the best of times, but in the face of a global climate emergency, it is perilous. Businesses do seem to be taking small steps to improve their reporting on climate risks, but it’s a slow crawl at a time when they need to sprint, and the stakes could not be any higher.”

“Companies that are serious about tackling climate change need to move at break-neck speed to put transition plans in place based on targets that are truly stretching. As it stands, they are falling dangerously short, with potentially devastating consequences for their own future, and that of the entire planet.”

A more upbeat finding in the Barometer is that an increasing number of businesses – 67% in total, rising from 58% last year – are using scenario analysis, as recommended by the TCFD, to assess the scale and timings of possible climate risks, continuing an upward trend from previous years; and almost three-quarters (71%) have used both qualitative and quantitative analysis.

However, very few companies – just 36% – are carrying scenario findings through to their financial reports (only a slight improvement on 33% from last year and 29% in 2022). Even fewer (32%) disclose any climate risks with a high financial impact, meaning that they face a potential blind spot when looking at how their finances could be impacted. In addition, there is an even more pronounced lack of acknowledgment of the risks in areas that will be most affected by climate change. For example, only 17% of companies in the Americas report that climate change could have a high impact on their business. This is despite the fact that the US and Canada are among the economies with the highest risk of it having a negative impact on GDP.

The results also expose a clear and widespread tendency towards short-term thinking, which could hinder progress towards net zero. More than eight in 10 businesses (83%) have set short-term targets for a reduction in greenhouse gas emissions stretching to 2030, but only slightly more than half (51%) have set goals for the longer term; and of those, only slightly less than a quarter (24%) have had their targets validated by the Science Based Targets initiative – the organization charged with developing the standards to help businesses reduce emissions.

Christophe Lumsden, EY Global Climate and Decarbonization Leader, says:

“There may be times when short-term targets do the trick, but this is not one of those times. Without a doubt, businesses see pursuing longer-term goals as a harder slog, and it is – but there are no short cuts for those that want to affect real change, and targets for the next five years should be seen as stepping-stones to 2050 net zero goals, never an end in and of themselves.”

In addition, businesses seem to be neglecting the full range of emissions in their transition planning. Just over half of companies’ decarbonization initiatives (55%) target so called “Scope 2 emissions” – the indirect emissions from purchased energy, perhaps because these are the easiest emissions to reduce. Only a slightly more than a third (34%) however, included any Scope 1 emissions – those that come directly from sources controlled by the company in question – and just slightly more than one in 10 (11%) covered Scope 3 emissions, which include all indirect emissions through the value chain, such as those from suppliers of raw materials.

Most businesses (84%), according to the report, do indicate that they conduct risk analysis, and they give equal weight to “transition risks” – which stem from changes in the economy resulting from climate change, and “physical risks” that are a direct consequence of climate change. However, as in the case of scenario planning, businesses aren’t reflecting these risks in their financial plans.

The report sets out six actions businesses can take now to bring about needed change:

  1. Develop a robust action plan rooted in science-based targets, informed by detailed scenarios and backed by financial investment.
  2. Reflect climate risks in financial statements and explore financial opportunities.
  3. Use data to inform decisions and drive action on risks and opportunities.
  4. Provide sustainability teams with sufficient resources – the funding, information and people needed achieve stated goals.
  5. Equip boards with the skills to provide effective governance on transition strategy.
  6. Explore cross-sector collaboration including with governmental and public sector bodies.

Dr. Bell, says:

 “Commercial realties – pressures to balance environmental goals with profitability, the shortage of green skills or the sheer complexity of the task – can be a huge drag on efforts to manage climate risks but there’s no escaping the fact that customers, shareholders, regulators and employees are all demanding action no matter what challenges it presents, and with global temperatures now at record highs, the consequences of apathy and inaction are clear for all to see.”

Emile Abu-Shakra is EY Global Media Relations and Social Media Associate Director – Tax and Assurance

This article was republished under the Creative Commons licence.

https://www.ey.com/en_gl/newsroom/2024/11/businesses-slow-crawl-on-climate-action-jeopardizing-global-environmental-goals

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