Businesses still fail to adequately consider financial implications of climate change

During the Dies Natalis on November 20, 2018, Peter Bakker – President and CEO of the World Business Council for Sustainable Development (WBCSD) – urged the business community to take on a leading role and secure a sustainable future for all. He believes we are entering a period of unprecedented transformation. On January 18, 2019, Nyenrode hosted a conference that fit in perfectly with this topic: 'Corporate responsibility in relation to climate change'. International firms, investment managers, insurers, human rights organizations and climate groups came together to address the key question: how can my business take responsibility for future generations?

Rules and agreements

These are turbulent times for climate change issues, according to Tineke Lambooy, professor of Corporate Law at Nyenrode. 'Several new agreements have recently been made to combat global warming, such as the worldwide Paris Agreement in 2015. These agreements were confirmed at the 2018 United Nations Climate Change Conference in Katowice'. Lambooy also briefly discussed the content of the Dutch Climate Act and the Climate Deal, both of which were approved in December 2018. She additionally highlighted the EU Action Plan that focuses on financial institutions and aims to stimulate sustainable growth through them, with special consideration for future generations.

Climate change is connected to human rights as well. Are these rights compromised when businesses do not take action? And is corporate responsibility increasing in this area? These questions were further examined and answered during the afternoon sessions.

Last week, the front-page headline of NRC Handelsblad read: 'Only together can we save the climate'. This shows that climate change is topical and requires action now.

Lambooy argues that 'companies must realize that those in management bear primary responsibility for developing a long-term strategy. In practice, however, the impact of climate change is still largely absent from management’s accountability. Another problem is that there is not yet a uniform way to measure CO2 emissions.'

What do companies report?

Remko Renes, assistant professor Corporate Governance at Nyenrode, studied how companies value their assets with due regard for the energy transition and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Together with Lambooy, Wim Bartels (KPMG and TCFD) and Rebecca Scholten (CR Lead at EY), Renes conducted a literature study and carried out case studies on the application of the International Financial Reporting Standards (IRFS) in this context. He examined the energy industry, since this sector should be particularly aware of the changing market. Renes was shocked by his findings.

Little regard for the future

'Companies that are drilling for oil only look at how many barrels they have produced. Their financial reports also lack information on the consequences that arise when less oil is available, or when political or social pressure causes drilling operations to be scaled back or demand for oil to decline. These considerations are not reflected in the valuation of their production assets either. Among businesses that generate renewable energy, it is striking to note that they actually undervalue themselves in their financial reports. These firms focus only on their current revenue and expenses. In doing so, they are not looking ahead: how much wind energy or solar power could they produce in the future? That is a missed opportunity.'

Speaker Wim Bartels of KPMG says: 'The difficulty when it comes to climate change is that businesses are unfamiliar with the topic. The less knowledge they have about climate change, the harder it is for them to make financial predictions about the future.'

Rules still unclear

Renes recommends that businesses include information about the effects of climate change in their financial reporting. This provides valuable information about future revenue and expenses, which is extremely important for investors. For instance, what is the threat of not being able to use expected gas or oil reserves? Is it possible to identify how much wind energy or solar power can be produced in the future, just like fossil energy companies are taking stock of their resources now? Renes explains: 'Financial information must be robust and complete. This information is also part of that. Unfortunately, the current rules on how to properly record such data are still unclear.' Companies must take action in this regard.