Investors, lenders, insurers have one thing in common: they need to understand to what extent businesses are exposed to climate risks. The EU Commission has now confirmed its plans to include climate risks in its guidelines for nonfinancial reporting. If your business is not reporting on its exposure to climate risks yet, read on.
In just a few years, climate risk has gone from an overlooked topic to an essential part of sustainability reporting. When the EU published its nonfinancial reporting Directive in 2014, climate risk was not high on the agenda. Five years later, the situation is quite different: in the wake of the EU Action Plan for Sustainable Finance, there is a growing realization that investors and insurers need to be able to assess the climate risks organizations are exposed to.
If your sustainability report does not cover climate risks, now is the time to change that.
What are climate risks and why should I report on them?
Climate risks are risks that are related to climate change. These can be physical, such as failed harvests resulting from droughts, damage to assets because of extreme weather, or higher costs because of a rising sea level. However, they can also be regulatory: public policies to decarbonize the economy, rising emission costs, carbon taxes, product regulations, etc.
For investors, lenders and insurers, being aware of these risks is of paramount importance: it enables them to make informed decisions for the long term. The EU Action Plan for Sustainable Finance has made this information need even more acute: the action plan aims to re-orient investments towards more sustainable technologies and business, and to contribute to the creation of a low-carbon, climate resilient economy. This entails that business who do not create transparency around the climate risks they face, will find it increasingly hard to attract investors, obtain loans and get sufficient insurance coverage.
Revision of the EU Guidelines
The first EU Guidelines for Nonfinancial Reporting, published in July 2017, did not make a recommendation on disclosing climate risks. A second version, to be published in the Summer of 2019, will change this. The new version will provide guidance to companies on how to disclose climate-related information and will be aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). The mission of TCFD has been to create a common framework for reporting the financial implications of these risks.
A detailed overview of what the guidance could look like is available in the EU Report on Climate-Related Disclosures, although changes in the final version cannot be excluded.
Non-Binding Guideline… but is it really optional?
To be clear: what is being updated are the non-binding guidelines for nonfinancial reporting, not the EU-Directive itself. However, that does not necessarily mean that companies do not need to report climate risks. The EU-Directive from 2014 already states that affected companies have to disclose “the principal risks” related to environmental aspects. For many companies, those “principal risks” will automatically include climate risks – and will therefore need to be reported.
What DQS can do for you
DQS is a licensed assurance provider for sustainability reports and ESG data. Our assurance engagements confirm the plausibility and appropriateness of sustainability data – including disclosures on climate risks. Our assessments also cover the extent to which the disclosed information complies with the EU-Directive on nonfinancial reporting. Contact us to discuss your project or subscribe to our newsletter for the latest news on sustainability.