On the day we celebrated the agreement on biodiversity crowning COP15 in Montreal, the firm KPMG noted a deficiency in terms of disclosure of the impact of our very large companies on natural capital. This lack of transparency is part of a regulatory framework currently being developed, where disclosure relating to environmental, social and governance (ESG) criteria remains voluntary and where harmonization is lacking.
The professional services firm KPMG clearly portrays the importance of the issue. “Biodiversity and the preservation of natural capital is the next frontier in environmental information, right after climate change. » With more than 50% of the world’s GDP depending moderately or heavily on nature and the services associated with it.
However, in Canada, only 35% of the 200 largest companies address biodiversity in their financial or governance reports. In their defence, KPMG recalls that the framework and recommendations regarding the risks and impacts on biodiversity are still being developed. “Therefore, the definition of a ‘good biodiversity disclosure report’ remains nebulous. The few companies that engage in it therefore use, for the most part, anecdotal examples and case studies that are usually out of step with the way society deals with these issues, notes the firm. “Data and goals are rarely disclosed, and reporting is rarely driven by policy. »
In a broader sense, principles have already been set out for ESG factors. However, only 64% of these large companies include information on sustainability or these factors in their annual financial report. We are talking here about the 200 largest Canadian companies by revenue according to the recent ranking of the Financial Post. This group selected by KPMG includes public and private companies, subsidiaries and crown corporations. It excludes holding companies.
Last November, PwC released its Canadian ESG Reporting Outlook, based on an assessment of reports published by the 250 largest companies listed on the Toronto Stock Exchange by revenue and market capitalization. Same observation: their commitment to these criteria is still far below the expectations of stakeholders and regulatory bodies. Their disclosure remains deficient, especially for indicators related to climate change.
It could be noted that 77% of companies do not include the principles of the Working Group on financial information relating to climate change in their financial reports. In fact, 38% of companies have not yet embedded their information on ESG issues and risk management. Moreover, 59% speak only of their positive results. By refining the reading to include indicators related to climate change among the ESG criteria, “although many of them disclose their emissions, Canadian companies seem to be just beginning to grasp the effects of climate change on their activities”, we have already written.
Doubts about the real value of companies
This slow migration towards disclosing its ecological impact, its carbon footprint and its management of climate risks is fueling uncertainty in a capital market increasingly inclined to measure and put a price on the associated physical and transition risks. to climate change. Analysts from the Monetary and Economics Department of the Bank for International Settlements (BIS) have surveyed recent literature addressing the issue or an aspect of the issue of adequately pricing climate risk. There are many studies which evoke uncertainty and imperfect information and which, in doing so, deplore the fact that the valuation of companies, markets and assets, financial or real, does not reflect these risks. In addition, externalities associated with climate change and greenhouse gas emissions can create a mismatch between the price set by financial markets and the true social costs, the BRI text reads.
A survey conducted in July 2021 among professionals and academics from the world of finance, public regulators and economists places the physical risk associated with climate change at the top of the list of risks for the next thirty years. A strong majority of respondents believe that asset prices underestimate climate risk.
Admittedly, stocks and bonds will trade at a discount if issuers are more exposed to climate or transition risks. A green bond trades at a premium to a comparable bond without this label. Increasingly, the credit rating of issuers will take this into account and analyzes will attach a price to the risk of finding so-called stranded assets on balance sheets and in portfolios. But beyond these à la carte observations, the difficulty of obtaining the information and, when it is present, of extracting the relevant data from it is a general observation.