The energy, transport and private equity sectors keep investors in the dark on net zero strategies, says a KPMG report.
Climate-related disclosures are the strongest and fastest-improving area of corporate sustainability reporting, but investors are still being under-served by a lack of transparency on net zero plans and commitments in key sectors.
Sustainability reporting is generally improving, with 79% of leading companies globally now providing sustainability reports. According to a report by KPMG, there have been “marked improvements” in companies’ reporting carbon reduction targets, but it acknowledges that “action remains too slow in key related areas”.
Separate studies released this week have identified major shortfalls in the climate-related disclosures and strategies of firms in the energy and transport sectors, as well as firms owned by private equity.
Over half of the world’s largest publicly listed energy companies are failing to disclose a decarbonisation strategy, less than 10% of transport companies have committed to phasing out fossil fuels and only three in ten of the world’s 100 largest private sector firms have set net zero targets.
Overall improvement in sustainability reporting
KPMG’s biennial report said that sustainability reporting has seen steady growth, with just under eight in ten of the top 100 companies in each country or jurisdiction analysed – also known as the N100 – providing sustainability reports. This figure has grown from ten years ago, when around two-thirds of the N100 group of companies provided sustainability reports.
Almost all UK companies provide some form of sustainability reporting, while also leading on social and governance risk reporting, with 95% of companies reporting on each category. North America and Europe have the highest overall reporting rates at 97% and 82% respectively.
The Asia Pacific (APAC) region leads with 89% of its companies undertaking sustainability reporting, followed by Europe (82%), the Americas (74%) and the Middle East and Africa (56%). At 55%, the Middle East leads on integrated reporting, followed by the APAC region at 30%. Latin America “stands out” on biodiversity reporting (50%), while African firms lead on social and governance at 51% and 49% respectively.
George Richards, KPMG’s UK Head of ESG Reporting and Assurance, said: “Within the drive for far greater transparency in reporting, companies will now have to shift to reporting their progress against those targets. This makes evidencing tangible actions very real and creates a much clearer link between reporting and a company’s strategy.”
The Global Reporting Initiative (GRI) remains the “most dominant” standard used globally for sustainability reporting, according to KPMG’s report.
Sustainability reporting becomes patchier beyond climate disclosures. KPMG’s report said that less than half of the world’s largest companies are reporting on the social and governance components of ESG. Only one third of N100 companies have a dedicated member of their leadership team responsible for sustainability and less than one-quarter of these companies link sustainability to compensation among business leadership. The report also highlighted action is “too slow” in some key related areas, including biodiversity loss being recognised as a risk by less than half of companies.
Low visibility from high emitters
But investors are still likely to find major information gaps as they seek to understand the climate risks in their portfolios, with emissions reduction plans and commitments missing from carbon-intensive firms and sectors.
A report by the newly launched Transition Pathway Initiative (TPI) Global Climate Transition Centre showed that 51% of the world’s biggest publicly listed energy companies are failing to disclose a decarbonisation strategy setting out how they intend to meet their long and medium-term targets for reducing greenhouse gas emissions.
According to data from the TPI Centre, less than one in five of the world’s 132 largest publicly listed energy companies would align with keeping climate change to 1.5C in 2050, and only 14% would by 2035. Nearly nine in ten of these energy companies also do not disclose how they are working to decarbonise their capital expenditures.
Simon Dietz, Professor of Environmental Policy at the Grantham Research Institute on Climate Change and the Environment, an academic partner of the TPI, said: “At present, many big energy corporations still do not have credible net zero targets. In the last few years, we have seen a commendable spread of corporate net zero goals, but in many cases these mid-century goals are yet to be backed up by climate-compatible goals in the short and medium term”.
The World Benchmarking Alliance (WBA) and environmental disclosure platform CDP’s joint report found that action and progress towards decarbonisation from 90 major transport companies is “limited”. According to the report, just 7% of companies have committed to phasing out fossil fuels. With the transport sector being responsible for 37% of global carbon emissions among all end-use sectors, the report says there is an “urgent need” for more investment in research to develop and scale sustainable alternatives.
The report found 85% of firms have fleets incompatible with a low-carbon future, but the majority fail to disclose plans for transition. Further, it said only 0.3% of total transport related revenues on average were being invested in research and development (R&D) into low-carbon technologies and fuels, such as electric vehicles and sustainable aviation fuels.
Analysis from the Net Zero Initiative showed that only 32 of the world’s 100 largest private firms have set net zero targets, significantly less than that of the 100 largest publicly listed companies at 69. The Net Zero Initiative’s report said that all 10 of the largest publicly-listed companies in the world have a net zero target or similar, compared with none of the largest 10 private companies.
Additionally, 14% of the annual revenue of high-emitting private firms is covered by net zero targets, compared to 77% of annual revenues of listed firms in the same sector. The report also found that private companies’ sustainability pledges are less likely to include interim targets, to cover all three emission Scopes and to give clarity on use of offsets.
According to Net Zero Tracker, while 50% of the largest private sector firms operate from the US, only 20% of those companies have net zero targets. This is significantly less than the US-based publicly-listed firms, where 73% have set a target. Net Zero Tracker suggests this limited adoption of targets in the US “appears to be due to a lack of any climate-related disclosure requirements for private companies comparable to those recently established by the UK and EU”.
John Lang, Net Zero Tracker’s Project Lead, said: “Private firms are falling devastatingly short on net zero compared with their publicly-listed cousins. As the shadow of disclosure regulation stretches across the whole economy, those private firms that choose to wave as the net zero train leaves the station risk becoming stranded.”
Read more articles like this on Regulation Asia’s sister publication, ESG Investor.