ECC 2

Terminology

• Physical risks: Direct and indirect risks resulting from climate change.

• Transition risks: Risks associated with the shift towards a decarbonized economy.

• Climate-related risks: Encompass both physical and transition risks.

• CDP Climate: CDP's climate database.

• TCFD: Task Force on Climate-related Financial Disclosures.

Purpose and Research Questions

The study investigates the following aspects of corporate reporting on climate-related risks:

• Relevance of climate-related risks:

  • How relevant are climate-related, and specifically physical, risks from the companies' perspective?

  • Are physical risks adequately considered?

• Governance and management:

  • How are climate-related risks integrated into existing governance and management structures?

  • To what extent do companies already have climate-related governance and management structures in place?

• Reporting according to TCFD:

  • To what extent is reporting already aligned with TCFD recommendations?

• Influencing factors:

  • What industry- and size-specific variations can be observed?

  • What differences exist between non-financial statements, sustainability reports, and CDP Climate disclosures?

Sample Composition

The study's sample includes companies categorized by size and report type:

• DAX-30 companies:

  • 24 included in the study based on Sustainability Reports

  • 26 based on Non-Financial Statements

  • 20 based on CDP Climate disclosures

• Top-100 companies (excluding DAX-30):

  • 33 included in the study based on Sustainability Reports

  • 24 based on Non-Financial Statements

• Small and Medium Enterprises (SME):

  • 16 included in the study based on Sustainability Reports

• Totals:

  • 73 Sustainability Reports

  • 50 Non-Financial Statements

  • 20 CDP Climate disclosures

Note: DAX 30 refers to the German stock index comprising the 30 largest stocks by order book turnover or market capitalization on the Frankfurt Stock Exchange.

Sample by Industry

The research sample includes companies from a variety of industries. The number in parenthesis indicates the number of companies:

• Other (12)

• Banks (8)

• Utilities (7)

• Insurance (8)

• Automotive (7)

• Mechanical Engineering, Trade, apparel (9)

• Food (5)

• Technology (8)

• Chemistry, pharmaceuticals (8)

• Commodities (4)

• Transport, logistics, tourism (6)

• Media, information service providers (3)

Types of Climate-Related Risks Reported in CDP Climate

DAX 30 companies reporting to CDP Climate identify various climate-related risks, categorized as physical or transition risks:

• Relevant Physical Risks:

  • Climate, acute: Increased severity of extreme weather events.

  • Climate, chronic: Changes in precipitation patterns and fluctuations in weather patterns.

  • Climate, chronic: Rising average temperatures.

• Relevant Transition Risks:

  • Legal: Regulations for existing products and services.

  • Legal: Increased prices for GHG emissions.

  • Legal: Other legal risks.

  • Market: Changed customer behavior.

  • Market: Other market risks.

  • Reputation: Increased concerns, negative feedback, and shifts in consumer preferences.

Potential Impact of Climate-Related Risks

Companies reporting to CDP Climate highlight the following potential impacts:

• Damages (e.g., to equipment, warehouses, real estate, etc.).

• Reduced production.

• Reduced turnover or profit margins.

• Increase in production costs.

• Increased raw material/procurement costs.

• Costs/loss of revenue due to penalties and court decisions.

• Costs of introducing new procedures.

• Higher capital costs.

• Adjustment of valuation of investments.

• Increased claims on insurances.

Potential Impact of Climate-Related Risks in Figures

Based on reports from 13 DAX-30 companies to CDP Climate:

• Risks due to climate change:

  • Number of risks described: 16

  • Potential damage (company statements): $6,624,600,000 €$

  • Expectation value (calculated): $2,216,400,000 €$

• Transition risks:

  • Number of risks described: 32

  • Potential damage (company statements): $11,230,800,000 €$

  • Expectation value (calculated): $8,868,000,000 €$

• Total:

  • Number of risks described: 48

  • Potential damage (company statements): $17,855,400,000 €$

  • Expectation value (calculated): $11,084,400,000 €$

Time Horizon of Risks

DAX-30 companies reporting to CDP Climate (data from 20 companies) identify risks across different time horizons:

• Current.

• Short-term.

• Medium-term.

• Long-term.

TCFD Recommendations

The Task Force on Climate-related Financial Disclosures (TCFD) provides recommendations across four key areas:

• Governance:

  • Describe the board’s oversight of climate-related risks and opportunities.

  • Describe management’s role in assessing and managing climate-related risks and opportunities.

• Strategy:

  • Describe the climate-related risks and opportunities the organization has identified over the short, medium, and long term.

  • Describe the impact of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning.

  • Describe the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a $2$°C or lower scenario.

• Risk Management:

  • Describe the organization’s processes for identifying and assessing climate-related risks.

  • Detail how these processes are integrated into the organization’s overall risk management.

• Metrics and Targets:

  • Disclose the metrics used to assess climate-related risks and opportunities.

  • Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks.

  • Describe the targets used to manage climate-related risks and opportunities and performance against targets.

Reporting According to TCFD

Assessment of DAX 30 companies' reporting based on TCFD requirements:

• Board's oversight.

• Management structures and tasks.

• Overview of climate-related risks.

• Impact of climate-related risks.

• Resilience of strategy, use of scenarios.

• Process for identifying climate-related risks.

• Integration in risk management.

• Key indicators.

• GHG emissions (scope 1, 2, possibly 3).

• Targets and performance against targets.

The degree of implementation is evaluated across CDP-Climate, Sustainability Reports, and Non-financial Statements.

Reporting on the Resilience of Strategy

Assessment focuses on:

• Overview of climate-related risks.

• Impact of climate-related risks.

• Resilience of strategy, use of scenarios.

Evaluated across CDP Climate, Sustainability Reports and Non-financial Statements

Reporting on the use of Climate-Related Scenarios

Data from 15 DAX-30 companies in CDP Climate 2019 on the use of climate-related scenarios:

• Physical climate change scenarios (6 mentions):

  • Examples include RCP 2.6, RCP 4.5, RCP 8.5 (all by IPCC).

• Transition scenarios (25 mentions):

  • Examples include IEA 2DS, IEA 450, IEA B2DS, IEA SDS, IEA NPS, BNEF, Carbon Pricing Scenario, DDPP, European Commission Decarbonization Scenario, Greenpeace, IHS Scenario, IRENA Scenario.

• Scenario alignment unknown (4 mentions):

  • Scenarios of the company, scenarios without indication of the name or source.

• Other approaches:

  • Environmental profit and loss estimate, NDCs, Science-based Targets.

Reporting on Governance and Management Structures

Assessment of governance structures in place to handle climate-related risks:

Explicitly for climate-related risks
Only for environmental/sustainability risks

Analysis of DAX 30 companies, top 100 companies without DAX 30, and medium-sized companies within Sustainability reports

Operational approach to climate-related risks

Assessment of operational approaches to handle climate-related risks:

Explicitly for climate-related risks
Only for environmental/sustainability risks

Analysis of DAX 30 companies, top 100 companies without DAX 30, and medium-sized companies within Sustainability reports

Operational approach to climate-related risks - Risk Identification and Integration

Assessment of operational approaches:

procedure for identifying climate-related risks
integration in risk management

Analysis of DAX 30 companies, top 100 companies without DAX 30, and medium-sized companies within Sustainability reports

Summary of Key Findings

• Relevance of climate-related risks:

  • Physical risks are acknowledged but often have lower priority compared to transition risks.

  • Companies that systematically address climate-related risks tend to perceive greater risks in the transition to a decarbonized economy than in the direct impacts of climate change.

  • Transition scenarios are used more frequently than scenarios focusing on the consequences of climate change.

• Governance and management of climate-related risks:

  • Most DAX 30 companies have established climate-related governance systems.

  • Companies issuing sustainability reports can leverage existing internal structures for managing climate-related risks.

  • Sustainability management practices are adapted for the governance and management of climate-related risks.

• Reporting according to TCFD:

  • Almost all DAX 30 companies report in accordance with TCFD recommendations, although not always publicly.

  • Sustainability reports often fulfill several TCFD recommendations partially or fully.

  • None of the examined reports provided information on the resilience of the corporate strategy as recommended by TCFD.

• Influencing factors and other aspects:

  • Industry-specific differences are evident, particularly in the types of relevant risks identified.

  • Company size influences whether and how explicitly climate-related risks are considered.

  • The report type impacts the level of informative reporting, with non-financial statements being the least informative.

  • TCFD recommendations encourage reporting on and management of physical climate risks.

  • CDP-Climate facilitates the identification of and access to climate-related information of companies.