Robust regulation on environmental disclosure is key to a net-zero, resilient economy
As the IPCC determines that we have just years to stop catastrophic climate change, robust regulation on climate transition plans will prove essential, argues Pietro Bertazzi, global director of policy engagement and external affairs at CDP.
“The choices we make in the next decade will determine our future.” This line from the latest report from the Intergovernmental Panel on Climate Change (IPCC), published only a few weeks ago, should serve as a driving force for both governments and business leaders. These words also serve as a reminder of how critical five-year climate transition plans are to our chance of achieving a net-zero, resilient economy.
Climate change is the single greatest risk to the global economy. Some of the risks and impacts of climate change are now within sight and, in many cases, inevitable or already baked in. According to CDP data, 215 of the world’s biggest companies report almost US$1 trillion at risk from climate impacts, with many likely to hit within the next five years. All companies must prepare themselves for these impacts and show that they have the ability to adapt through resilient business models.
One of the most effective ways companies can do so is through the development and disclosure of credible climate transition plans. A climate transition plan is a strategy that accounts for actions companies will take in the next five years and must include robust, quantitative, and accredited science-based targets outlining how companies will transition to the 1.5°C-aligned business model, how their capital allocation will align with this and what governance the company has in place to ensure delivery.
A climate transition plan can’t just be written and forgotten about – progress needs to be disclosed so it can be tracked and held to account. It must also include adaptation measures, in addition to permanent mitigation measures. You only need to look at recent headlines to see why having credible climate transition plans is so crucial. Aside from scientific warnings of the IPCC, corporate commitments have recently, and rightly, come under increased scrutiny, with claims of greenwashing rife.
Climate transition plans can be a critical tool in tackling greenwashing, ensuring that companies haven’t just set net-zero targets with the hopes of kicking the can down the road, but that they actually have plans in place and a roadmap to get there.
Regulation will be crucial in boosting accountability and transparency. The development and disclosure of climate transition plans have historically been at the request of investors and stakeholders. However, new data published by CDP makes clear that voluntary disclosure is no longer enough. Of the 13,100 companies that disclosed environmental data to CDP in 2021, just one-third reported developing a low-carbon climate transition plan. CDP’s latest report, Are companies being transparent in their transition?, also shows that a paltry 1% (135) of companies reported through the total 24 key indicators associated with a credible climate transition plan.
Whilst we have seen a welcome wave of support for mandatory disclosure regulation based on the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD), governments that can, should go further: alongside mandatory TCFD disclosure, governments should use regulatory powers to encourage the development and disclosure of companies’ climate transition plans, to ensure that financial sector stakeholders understand and invest in company transitions towards net-zero. As an integral part of mandatory disclosure regulation, requiring companies to develop and disclose climate transition plans will help ensure that transparency and accountability are embedded into their business models.
This is a key part of what CDP calls “high-quality mandatory disclosure” and it must happen quickly – accountable climate transition plans will be central to our ability to halve emissions by 2030 and reach net-zero by 2050. As the IPCC warned, the next ten years will likely determine the future of the planet.
Encouragingly, policymakers in some nations and jurisdictions are starting to take notice. At COP26, the UK announced that from 2023, asset managers, regulated asset owners and listed companies to publish climate transition plans that consider the Government’s net-zero commitment. We hope that this requirement will be extended beyond the current scope, to include all large companies and financial institutions. All corporates and financial institutions should have a strategy in place to decarbonise in line with the Paris Agreement and address the risks they face.
The most recent IPCC report must serve as a call to action for governments and corporates in the high-emitting economies most responsible for climate change. Our window for meaningful action is narrowing. According to The Climate Transparency 2021 report, the G20 is responsible for approximately 75% of GHG emissions. However, our report shows that no G20 country has more than 4% of its organisations disclosing against all 24 indicators of a credible plan. So, we encourage climate transition plans to be on the agenda of G20 leaders when they meet in Bali, Indonesia in October.
Companies are showing that they are ready for more ambitious policy to support them as they make the transition to a net-zero, nature-positive economy. In October 2021, companies and investors including Tesco, Aviva and Legal & General Asset Management called on the UK government to introduce mandatory climate plan disclosures. This was followed only weeks later by the announcement of said regulation. This is the Ambition Loop in action: a positive feedback loop where private sector and government action reinforce each other in building a truly resilient and sustainable future. But companies, investors and governments must now go further and faster, in the narrow window we have left.