CURRENT STATE OF CLIMATE-RELATED FINANCIAL DISCLOSURES. CRITICAL EVALUATION AND COMPARISON OF THE LEVEL OF TCFD DISCLOSURES AND TO IDENTIFY AREAS OF IMPROVEMENT
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EXECUTIVE SUMMARY
The current analysis evaluated three companies’ named BASF, Solvay, and Evonic to assess their level of climate change disclosure. The analysis revealed that the firm governance, strategy, risk assessment, and targets were all directed towards climate change mitigation. However, their level of disclosure differed in details. The analysis resolved that most risk for the firms were with regards to waste management, water management, energy, and CO2 reduction. However, the disclosures were not to the extent of adopted means and the cost and benefits of the measures. Thus, the analysts recommended for intensive disclosure especially in monetary, and evaluation of adopted measures with regards to their cost and benefits to climate change mitigation.
INTRODUCTION
According to TCFD, a firm should be in a position to make its discloser with regards to climate change on aspects of strategy, governance, risk, and targets. This is from a resolution that climate change has serious consequences on financial stability of a firm. Besides affecting a lot of sectors, it has become a crucial element in every management decision. Climate change has become a concern even during policy making process as it portrays a great threat to the world. This has led to heightened measures to dealing with climate change. One of the measures is a requirement for all firms to make disclosures with regard to the much they are doing to mitigate the adverse effect of climate change. Research has shown that it’s only with information, that appropriate measures can be advocated. Thus, TCD advocates for disclosure to improve on climate change reporting. It has seen the disclosure as a way to improved strategic planning, capital allocation, and risk assessment. Thus, it has called on reporting with regards to four majors metrics that include; governance (with this regard, a firm will disclose its governance on climate related risk and opportunities), strategy, risk management, and metrics & targets.
BODY
Governance
Governance entails all structures and processes that a company has laid down to ensure accountability. In this regards, BASF, through its management and its organisational structure it has set out processes that allow for assessment and mitigation of climate change. The board of directors as well as the management with a supervisory board helps to manage the risks and opportunities due to climate change. The firm has been structured to ensure that they improve sustainability, and reduce negative impacts. The firm has integrated its sustainability process into their daily business activities. During project investment, the firm has a board that systematically assesses the effects of climate change. This decision is a bases for investment, acquisition of equipment in the firm. Thus by evaluating the potential impact, as well as the harm an investment would cause, the firm is able to assess risks and opportunities posed. Thus it is material to the firm with regards to the effect the firm leads to and the effect on the firm. As such, the firm is structured to ensure a decision that is made is critically assessed, the board, and another external unit to ensure less harm is caused, and opportunities are well vested. In addition a supervisory board is set out to asset each investment decision as more so with regards to its climate change effects.
Solvay, through its organisational governance where they have adopted a purpose led culture, the firm has in place a climate change committee to ensure all decision factor in climate change. They have in place an end-to-end value creation model which ensures environmental protection. The governance of the firm is structured such that the firm is able to achieve its goals and create sustainability
Evonic governance structure allows for accountability as well as transparency. In this regards, the firm governance structure has integrated climate change as a major risk. Thus, a board has been structured to ensure mitigation priority. The firm has at its main objective an agenda of halving greenhouse gases by 2025. They have also aimed at reducing energy consumption by 5%.
Strategy
Strategy refers to the plan of action that is followed by a firm to help it meet its organisational objectives. BASF has proved to be a strong organisation with regards to its strategy. The firm has integrated its actions and every objective with sustainability. Thus its objectives are driven towards less harm. The firm has well been able to identify with short as well as long-term risks and opportunities. In the short-term the firm has identified a lot of risks as well as opportunities. Besides it has also suggested ways that integrate to its strategy to be able to deal with the risks. Some of the identified risks and opportunities include; market growth through identification of best markets has been a major risk as well as an opportunity for expansion. Margin volatility due to ups and downs in the demand for chemicals has been a major risk, competition, regulations, political risk, information technology, personnel, investment and production, acquisitions, legal disputes, supply chain, exchange rate volatility, interest rate changes, liquidity risk, impairment risk, and risk from pension obligations. Some of the long-term identified risks include; demand development, innovations, customer’s development, employee’s recruitment, acquisitions, portfolio investments, sustainability. The firm has adopted a climate management tool that has been advanced to ensure climate change aspects are integrated to the firm’s objectives. Besides, the firm has a integrated sustainability approach where they have ensured proper steering is done before investment. For the firm to be able to include some aspects like lower climate related scenario, it has since 2020 redrafted its long-term strategic goal.
Solvay, in the year the firm redesigned its business strategy to accommodate climate change as they sorted climate change as an element that needed immediate action. It was considered a priority topic for the firm and thus was integrated into its core business strategy. The firms has identified as well as integrated its project approach through decentralised strategy to ensuring climate change mitigation. Use of strategic approach and competencies the firm has ensured each project is well taken care of with regards to its geography. A steering committees has been put forth to ensure sustainability measures are adhered to. The firm through its comprehensive monitoring strategy was able to reduce the greenhouse gas emissions by 5%. The firm has also embraced resource efficient measures, as well as eco-friendly solutions to be able to manage the low emission levels. Through the groups the firm is able to do intensive risk assessment. Periodic reviews through the audit committee is done to ensure risks are well managed. The firm has also brought its stakeholders on bond to manage greenhouse gasses, waste management, energy, and sustainable solutions. The firm as well has identifies environmental hazards as an emerging risk to the firm. Thus through its board, it has evaluated strategies like waste management strategies to be able to deal with the situation.
Evonic, firm has major target towards climate change management. It has sorted to ensuring water management, waste management, and biodiversity. The firm has climate change mitigation and water management targets. The firm has reduced its CO2 emission drastically in the recent years. In addition, the firm has integrated its stakeholders to climate change mitigation.
Risk management
BASF risk management sees into how a firm is able to identify and manage the climate change related risks. The firms has thus made use of integrated processes that help in risk identification, used decentralised management, and aggregation of groups. The firm through the executive board as well as the departmental segments has identified and brought out ways to manage the risks.
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