Delivering for the environment - Net zero commitments and long-term corporate strategy

Our Reporting Matters 8 research reveals the findings of our research on companies’ awareness of environmental issues in their annual reports.

To understand how well companies are integrating and reporting on environmental issues, Luminous’ Strategy & Insight team analysed the stewardship reports of the largest 20 institutional investors to understand the cut across themes.

As you would hope, virtually all companies in our sample demonstrate awareness of environmental issues in their annual reports. This is particularly true for climate change, driven by mandatory SECR and TCFD reporting and, from next year, the publication of transition plans setting out how companies will adapt to a low-carbon economy.

However, in the first year of mandatory TCFD reporting, we observed confusion between pillars, particularly Strategy and Risk Management, and reluctance to discuss the financial impact of climate change, suggesting a lack of familiarity with the 11 recommended disclosures.

Moreover, while GHG emission reduction is increasingly included in KPIs and even executive remuneration, some companies still struggle to link their net-zero commitment to their long-term corporate strategy and over half haven’t published a net-zero pathway.

It is also worth noting that, while climate change is increasingly considered in terms of risks and opportunities, this doesn’t yet extend to other parts of the natural environment, such as rivers and forests, even though an impressive number of companies already mitigate nature-related impacts. In fact, some companies still don’t publish targets for their ESG commitments and a surprising number haven’t even undertaken a materiality assessment.

Lastly, while a majority of companies submit CDP responses and align their ESG commitments to the UN Sustainable Development Goals, other international frameworks, including staples such as GRI and SASB, are less widely used and only a minority of companies explain how their contribution to the SDGs is measured.

Our findings

In the context of our ‘Reporting Matters 8’ study, our key findings are as follows:

1. 75% of companies are committed to achieving net zero, but 43% have published a pathway with timebound targets
2. Less than 47% of companies explain how net zero is integrated into their long-term corporate strategy and almost 20% don’t link the two at all
3. While over 55% of companies identify climate-related ESG as material, the other 45% have not even carried out a material assessment

Our recommendations

• Explain how net zero is integrated into your long-term corporate strategy
• Carry out a double materiality assessment to identify ESG issues that are material for your business
• Align TCFD disclosures or provide a roadmap to full disclosure
• Consider nature-related issues in terms of risks and opportunities for your business to prepare for the upcoming Taskforce on Nature-related Financial Disclosures (TNFD) framework, which is based on TCFD and designed to complement it
• Publish a transition plan which explains how you will adapt as the world transitions towards a low-carbon economy

At our launch event on 20 July, Luminous’ Stephen Butler, Investor Engagement & ESG Disclosure Director, Rachel Madan, Sustainability & Impact Director, and Nina Kefer, Senior Consultant, along with Claudia Chapman, Head of Stewardship at the FRC, and Lindsey Stewart, Director, Investment Stewardship Research, shared the outcomes of our Reporting Matters research. They also offered practical advice on defining, reporting and engaging around ESG strategy, as well as how to integrate ESG in your Annual Report.

If you would like to access the recording and slides from our event, please get in touch.

Stephen.Butler@Luminous.co.uk