How ESG reporting can address climate risk

Reporting on carbon emissions and carbon neutral targets is increasingly standard practice for large companies, investment funds, local governments and forward-thinking small to medium enterprises. This is not only due to ethical convictions around the importance of decisive climate change mitigation action, but also the wider regulatory environment is shifting to mandate disclosure of emissions as part of general financial and sustainability reporting.

The International Sustainability Standards Board (ISSB) has released frameworks for mandatory disclosure of climate-related risks that are due to take effect in 2024 for an initial tranche of entities, and national regulators are following suit, including Australia, where the Treasury plans to make reporting mandatory for the largest entities from the 2024-25 financial year.

But carbon emissions are not the end of the reporting story. The ISSB will require a broader range of matters to be covered in the near future, and some of these matters are already touched on by other legislation such as the UK and Australian Modern Slavery disclosure requirements.

To address the wider scope of risk and ethical responsibilities, robust frameworks for managing and evaluating ESG (environment, social and governance) matters have become as essential as double-entry bookkeeping.

Climate risk is not an abstract or political concept, it is a very tangible set of circumstances that touch on multiple areas of ESG. On the social front, for example, the impacts of climate change including extreme heat, severe weather events, wildfire, flooding and disruptions to essential services and infrastructure pose a genuine threat to the health and wellbeing of staff, customers and stakeholders.

This feeds into a financial risk of disruptions to business operations, costs of damage to assets and equipment, and workers compensation liabilities. Supply chains may be cut or compromised, customers may lose their livelihoods and become former customers, and some materials may become increasingly scarce as impacts escalate or manufacturers pivot away from high-emissions, extractive practices to a more regenerative, circular economy model.

Reputational risk is also a concern. The regulatory settings around sustainability claims now require more from an organisation than aspirational statements and pledges of care. Plans to “take action on climate change” now need to be backed up by quantifiable attainments, transparent benchmarking and visible validation. Meaning and measurement are essential, and these form the core of sound ESG strategies and reporting.

There is also a matter of ethics here, which is the responsibility corporate entities have to examine social and environmental matters within their operational footprint, including the supplier network. Increasing greenhouse gas emissions and the associated climate risk is one piece in a bigger picture of the overshoot of the planet’s capacity to meet our collective demands. Planetary boundaries are real, including limits to fresh water, loss of biodiversity, scarcity of material resources and loss of soil health.

Climate change is the most severe and immediate symptom, but in many places water pollution, land degradation and loss of pollinator species are having an equally profound impact. New frameworks including the Taskforce on Nature-Related Financial Disclosures (TNFD) are coming into play as the financial sector recognises the need for the “E” in ESG is more than carbon, and that the environment needs to be understood as a system and protected holistically.

ESG reporting therefore becomes a tool for changing the modus operandi to not just focusing on financial or revenue growth but operating a business sustainably within the planetary boundaries and the social parameters as laid out in the UN Sustainable Development Goals.

For the property sector, one of the major challenges here is the issue of housing. We do not meet the SDGs while people remain unhoused, and shelter is a fundamental human right. The current trajectory of the property industry in the English-speaking nations is moving further and further away from meeting this basic need. When the term “property value” is used as a positive phrase to describe ever-rising costs of obtaining shelter, rather than aligning with the social value of ensuring people are protected from the elements and climate risks, we have a major ethical issue that compromises the social license to operate and can become a reputational risk.

One could argue that as the property sector is also responsible for 30% or more of global carbon emissions, and those with the lowest incomes are most vulnerable to the consequences of the resultant climate changes, there must be a greater emphasis on the social dividend of ensuring all people have a safe home.

It will probably require political instruments to address this, which brings us to the “G” in ESG. Ideally, industries self-regulate based on common sense and ethics. However, as we have seen with other issues including pollution, vehicle safety, hazardous substances and fair wages, too many organisations do not apply good governance to their own affairs. In response to this, governments implement regulation and policy which become the final resort to achieve outcomes that truly serve society.

COP28 will again see the gap between words and actions in the spotlight, as nations are asked to report on their actions to achieve decarbonisation. While world leaders will be in the glare of the media and the official minute-takers, individual businesses and financial organisations should also take note. What we expect of our governments we also need to enact within our own remit. That means sound policy, prudent decisions and meaningful, measurable action – the essential ingredients of both ESG reporting and a climate risk management strategy.

It is time to ramp up action – less talk of targets and more tangible actions. And for those who have not started on their ESG journey yet – don’t wait to get it perfect, just start. That’s the only way to get anywhere.