The finance industry demonstrates a low level of climate-related risk awareness even though it is among the sectors most exposed to it, a research project has found.

The study by the Alliance for Corporate Transparency, initiated by public interest law organisation Frank Bold, brings together civil society organisations and experts.

It assessed reports of 1,000 of the largest companies in the EU to provide evidence-based recommendations for legislative changes to drive the debate on the standardisation of corporate sustainability reporting.

The study comes as the EU Commission launched a review of the Non-Financial Reporting Directive (NFRD), after it found that it leads to insufficiently comparable or reliable sustainability reporting data.

Among the most frequently used reporting frameworks are: the Global Reporting Initiative, United Nations Global Compact, United Nations Sustainable Development Goals, OECD Guidelines, CDP and International Labour Organisation Standards.

Corporates can choose different reporting frameworks under the current NFRD. The project also notes that the materiality of a sustainability issue for any company depends on the sector and operational context.

Climate data

While the financial sector has an important role to play in the low-carbon transition, the findings pointed to it lacking this understanding.

It found that just 13.4% of finance organisations are specific about the exposure of their lending, investment and underwriting activities to sectors contributing to climate change, or provide an estimate on their assets’ exposure or collaterals’ value to climate-related risks (3.1%).

Only 20.5% of financial companies disclosed climate-related targets, putting it firmly behind the other sectors in the report.

This compares with “36.4% of companies in energy and resource extraction” which report on climate-related targets, the report noted.

When it comes to science-based targets, from a cross-sectoral perspective, only 13.9% of companies disclose relevant data.

Especially lacking was disclosure on climate-related scenarios used to inform company strategies, with 7.2%.

Sustainability opportunities

The study also highlighted that reporting on positive impact is key to providing investors with information about corporates’ sustainable activities, in line with the EU’s taxonomy.

Yet, only a minority of companies report relevant and decision-useful information on strategies or initiatives that create sustainable development opportunities, the report said.

Meaningless data

Less than half of companies provide information on at least one strategic sustainability-related risk (45.9%).

However, only a minority (7.2%) include information on how these risks are reflected in their core business strategies.

The alliance found that “while many companies, albeit still a minority, disclose fairly-detailed policies, significantly fewer businesses provide information which is necessary to understand their situation and future development”.

Its main conclusion was that “at large, the quality and comparability of companies’ sustainability reporting is not sufficient to understand their impacts, risks, or even their plans”.

In addition to Frank Bold, the projects names the WWF, Transparency International and Business & Human Rights Resource Centre among its members.

• This article was first published on ESG Clarity’s sister site, Expert Investor