Embracing a New Era: Climate & Nature Disclosures in Financial Reporting
Climate and nature disclosures are set to become a staple in standard financial reporting. With increasing awareness of environmental issues and their impact on business sustainability, investors and stakeholders are demanding more than just financial data. They seek insights into how companies interact with and impact the environment, such as those set outlined by the International Financial Reporting Standards (IFRS) and the Task Force on Nature-related Financial Disclosures (TNFD).This transition marks a pivotal moment for businesses worldwide, heralding a new era of transparency and competition based on environmental footprints.
In this new paradigm, a company's environmental footprint becomes a critical factor in attracting customers and financing.
The Drive for Transparency
This shift towards greater transparency is shaped by evolving reporting initiatives and regulatory requirements, but is driven by an increasing understanding of externalities that can impact business’s license to operate, such as company’s GHG emissions, effects on labor markets, and consequences for supplier health and safety. According to Bloomberg, mentions of "biodiversity" or "natural capital" in S&P 500 filings rose 44% in 4Q vs. the prior year. Similarly, research by Factset states the number of S&P 500 companies citing “ESG” on earnings calls increased from 14 in Q4 2018 to 96 in Q4 2022.
There is growing critique, however, regarding the need to report on such metrics. Objections include that ESG and biodiversity metrics cannot be accurately measured, and the data collection and accounting investment needed to do so is a burden to companies. This argument has traction, and is identical to critiques raised when more stringent financial accounting standards were put in place. From the creation of U.S. Securities and Exchange Commission (SEC) after the Wall Street Crash of 1929 that led to the Great Depression, to release of the Sarbanes-Oxley Act (SOX) in response to the 2001 Enron scandal, the field of financial accounting has adapted to economic, technological, and regulatory change.
Since the 2010s, as the Paris Agreement came into effect and understanding of the influence of corporate actions on social conditions and the environment increased, focus has concentrated on sustainability and ESG reporting in financial accounting.Today, reporting frameworks and requirements – such as that in TNFD and the Corporate Sustainability Reporting Directive (CSRD) – guide companies on how to disclose ESG impacts, ensuring that stakeholders can assess a company’s sustainability strategy and its risk and opportunities. A leading example of this integrated reporting is Grieg Seafood, a Norwegian salmon farming company, that opens its annual report with recognition of its dependence on natural resources and robust metrics on how it is accounting for it.
Businesses are no longer judged solely on financial performance; their role in combating climate change and preserving biodiversity is equally scrutinized.
Competing on Environmental Credentials
In this new paradigm, a company's environmental footprint becomes a critical factor in attracting customers and financing. Businesses are no longer judged solely on financial performance; their role in combating climate change and preserving biodiversity is equally scrutinized. The trend is reflected in the growth of ESG-related assets under management, which were $30.3 trillion at the end of 2023, almost double from $18.4 trillion in 2021. Assets assigned to biodiversity funds specifically have increased to $1.05 billion from $226 million in 2021. Companies with lower carbon footprints, more sustainable practices, and proactive approaches to biodiversity conservation are likely to gain a competitive edge.
The Future of Corporate Reporting
The integration of climate and nature disclosures into standard financial reporting signifies a fundamental change in how businesses operate and are evaluated. It's a step towards greater accountability and a sustainable future, where environmental stewardship becomes a cornerstone of corporate success.
Putting these frameworks into practice does require organizing and collecting new data in a transparent and accountable manner – often with help from a specialized software or expert. Get in touch today to see how Dunya Analytics can help your company start its nature-accounting journey.
