Transparent reporting on the way to 'net zero'
14/04/22
Climate reporting connects reduction ambition, governance and transformation
In order to limit the rise in temperature on earth to 1.5 degrees Celsius in 2030, as agreed in the Paris Climate Agreement, CO2 reduction will have to increase significantly in the coming years. Many organisations are busy setting up their net-zero strategy and their aim for net zero CO2 emissions. A cornerstone in this is transparent reporting, one of the building blocks in the publication ‘The building blocks for net zero transformation’.
Formulating an ambition for CO2 reduction immediately leads to the question of what you are going to report on and where that information is going to come from,' says PwC expert Karin Meijer. 'The actual reporting provides steering information for the corporate strategy and the transformation of the organisation.'
'Formulating an ambition for CO2 reduction, immediately raises the question of what you are going to report on and where that information is going to come from.'
There is no escape from net-zero transformation
With PwC's ESG team, Meijer supports clients in a variety of sectors with issues such as climate reporting. PwC's reporting advice is based primarily on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The recommendations, which are grouped into four pillars, provide a sound structure for reporting to internal and external stakeholders.
Meijer: 'The ecological necessity for companies to reduce CO2 is very clear. But also from a business economic perspective, most companies will go through a net-zero transformation. If they are not already doing so for a better world, they will have to do so to stay in business. Companies standing out and producing a lot of CO2, there is no escaping a transformation. But also companies that operate out of public view will be asked by their chain partners to come up with a reduction plan.
Information for external stakeholders
Meijer's colleague within the ESG team, Jonathan Dul, who works primarily on climate risk management, calls reporting an obvious building block in the pursuit of 'net zero': 'If you set targets, you will want to report on them. Partly to create internal steering information on which management can base actions and partly to show progress to external stakeholders.
With external stakeholders, Dul refers to shareholders, banks and other capital providers. They use this information for investment decisions and will increasingly base their decisions on the climate objectives set. Companies must be able to show that they can operate in a future economy with low CO2 emissions. If that is not the case, it entails a transition risk.
Standards for climate-related reporting
For the elaboration of the CSRD, which is currently underway, PwC expects to see much alignment with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), the leading standard for climate-related reporting. While the TCFD has, since its inception in 2017, mainly addressed reporting on climate risks and opportunities, last October's update also includes recommendations on the transition to a low-carbon economy.
Meijer: 'We use the TCFD's recommendations with clients because they provide a sound structure for reporting to internal and external stakeholders. Rating agencies also read the companies’ explanatory notes - they often base their criteria on the recommendations of the TCFD.
Regulation also a reason for climate reporting
In addition to the requirements of financiers, regulation is also a compelling reason for companies to start reporting. For example, there is the EU taxonomy, the European classification system which brings clarity in the definition of sustainable activities. From the annual report for 2021, companies of public interest (PIE) with over five hundred employees as well as companies that offer financial products will need to report according to the EU taxonomy. From 2023, the 'Corporate Sustainability Reporting Directive' (CSRD) will also come into force, which will impose more requirements on sustainability reporting, for a larger group of companies.
Reporting in four pillars
The TCFD provides recommendations for reporting in four pillars: governance, strategy, risk management and indicators and targets. Clients’questions may relate to any of the four pillars. PwC helps clients with:
- setting up governance around ESG,
- identifying the strategic risks and opportunities of climate change and the energy transition through qualitative and quantitative analyses,
- drawing up transition plans towards net zero,
- integrating climate risks into risk management processes, and
- measuring GHG emissions and setting targets for them.
We help our clients with the implementation of each of these pillars, regardless of the maturity of their climate policy,' says Meijer. The first step is often an assessment, in which we analyse how much work is required to comply with TCFD. The next step is to build an implementation plan to fill in the gaps.'
Complete ESG trajectory or partial advice
Asked for an example, Meijer tells about a project with a large investor who wanted to make major steps quickly with their ESG policy. As this client did not have any internal ESG expertise yet, we were asked to go through the entire process on various subjects. On the climate front, we helped the company to set up their climate strategy, analyse climate risks and opportunities, set emission reduction targets and organise climate reporting on the four TCFD pillars.
Another recent example is the work for a bank, which had expanded its ESG reporting over the years. Meijer: 'They needed a framework in which they could bring everything together. We did a gap assessment on their reporting and built the framework that allows them to report in line with voluntary standards like TCFD and regulations like CSRD.'
'A question that arises in many companies is how the reporting function can best be organised. Which department is responsible? And how is this information retrieved from the organisation?'
TCFD recommendations in practice
- Governance
- Strategy
- Risk management
- Indicators and targets
Governance
The governance pillar focuses on the tasks and responsibilities surrounding non-financial information, including carbon reporting. The TCFD offers a specific method, in which the company sets up a separate risk team that looks at climate risks, among other things.
Desi Walsarie, part of the ESG team, advises clients on reporting non-financial information and tells about a governance related subject: 'A question that arises in many companies is how the reporting function can best be organised. Reporting originally takes place in the finance department, but will finance also report on non-financial matters? Or will the responsibility lie in a separate office? And how will that information be retrieved from the organisation? We can help clients with these questions.
Strategy
The TCFD's recommendations relating to the strategy pillar deal with the transition to 'net zero', among other things. What plans does a company have to realize the transition? Meijer: 'Many companies aim to operate "net zero", but do not have a concrete interpretation of how to actually achieve it. The TCFD challenges them to do so, by requesting a resilience description of the strategy in different climate scenarios. The impact of climate-related risks and opportunities on the business and financial planning is also addressed'.
Risk management
The risk management pillar looks at how the organisation identifies, weighs and controls climate-related risks. Dul: 'This concerns the physical risks of, for example, higher temperatures and rising sea levels, but also the transition risks that arise as a result of society becoming more sustainable. Thinking in terms of "net zero", this is about CO2 pricing and rising oil prices, the aforementioned credit rating and the general sustainability of the business model if emissions reduction does not go fast enough. The risk pillar supports the process on the organisation's transition objectives and the timeframe.
Indicators and targets
The fourth pillar requires organisations to formulate indicators and targets to manage climate risks. Walsarie: 'As far as indicators for CO2 emissions are concerned, concrete calculation methods from the Greenhouse Gas Protocol are available. The greatest challenge in organisations is often collecting the data for the indicators and the system design. We gained a lot of experience with this, from our work on financial and non-financial reporting. We helped a coffee producer, for example, to map the greenhouse gases in the chain and to determine reduction targets.
PwC ‘net zero’ in 2030
Karin Meijer concludes: 'PwC has committed itself to "net zero" by 2030. We report internally, and externally through our annual report on this ambition, the objectives on the road to 2030 and the progress we are making. This is another way in which we can inspire our clients and provide them with a practical service.
'Shareholders, banks and other capital providers use reports as a source of information for investment decisions and will increasingly base their decisions on the climate targets set.'
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