First Steps: Corporate climate & environmental disclosure under the EU Non-Financial Reporting Directive

Following the first year of reporting under the EU Non-Financial Information Directive (2014/95/EU), CDSB and CDP conducted a review of corporate disclosure of climate change and environmental information across Europe.

This research provides evidence of reporting practices of 80 companies, indicates what information companies are currently disclosing and whether companies are implementing the recommendations of the G20 Task Force on Climate-related Financial Disclosures (TCFD).

This research is the first comprehensive review of the Directive implementation by companies, assessing company annual reports and non-financial statements of 80 of some of the largest companies from across the EU, representing a combined market capitalisation of €3.75 Tn.

The review shows that market leading companies (and groups) are capable of reporting on climate-related issues and environmental matters. At the same time, companies do not consistently report information. Inconsistency and gaps in information hinder comparability between companies and over time, which may ultimately lead to mispriced risk and the inefficient allocation of capital. 

Findings

The research found that:

  • 83% of companies disclose their business model in some shape or form;
  • 99% disclose their policy approach to at least one key non-financial aspect;
  • 76% disclose the role of environmental or climate change matters in their financing and investments; and
  • 79% identify at least one climate or environmental risk.

However, there is room for improvement. The evidence shows that:

  • Less than half (48%) of the sample describe their due diligence processes for climate and environmental risks;
  • Only 13% identifies the time horizon associated with an identified climate or environmental risk; and
  • 39% of all companies disclose scope 1, 2 and 3 emissions and only 41% disclose GHG emissions targets. 

Companies are also beginning to report on the governance elements of the TCFD recommendations, which are not currently required by the Directive:

  • 75% of companies disclose board-level oversight of climate and environmental issues while a smaller proportion discloses management’s role of the same (64%) (TCFD governance recommendations (a) and (b)); but
  • Only 1 company reviewed (Unilever) has conducted and reported fully on its climate-related scenario analysis and has disclosed details of this analysis, including key assumptions and impact to the company and strategy (aligned with TCFD strategy recommendation (c)).

This evidence demonstrates that there is more that needs to be done in order to provide a clear and comprehensive overview of corporate performance and dependence on climate and environmental matters. The report therefore concludes with 7 recommendations.

Recommendations

  1. Make disclosure of climate-related information explicit in the Accounting Directive.
  2. Remove the exception in the Directive allowing for material information required for the non-financial statement to be reported outside the management report.
  3. Align corporate governance disclosure requirements in the NFRD and the TCFD recommendations, exploring how conformance with one could be treated as satisfying the requirements of the other.
  4. Incorporate the TCFD strategy core element’s recommended disclosure on resilience and scenario analysis in the Accounting Directive and require the use of a 1.5°C scenario based on the science presented by the UN Intergovernmental Panel on Climate Change.
  5. Ensure Member State competent authorities supervise reporting on environment and climate-related matters, thereby generating the feedback necessary for enhancing corporate disclosures on climate-related and environmental information.
  6. Consider how to promote greater use of the information contained in the guidance to the Directive, exploring means for better assimilation of the Commission’s guidelines into national corporate reporting frameworks.
  7. Incorporate all 11 TCFD recommended disclosures and consider how better linkages between financial and non-financial information can be made in the Directive, drawing on the essential approach of the TCFD.