Companies globally are only incrementally improving the quality of their climate-related disclosures, with only around a third referencing climate-related financial impact on their financial statements, and nearly sixty percent not yet disclosing transition plans, according to a new study released by global professional services firm EY.

The study also found that to date, most companies’ climate action strategies are focused primarily on reducing emissions from their use of energy, or Scope 2, rather than on addressing the substantially greater climate impact of their broader value chains.

For the study, EY’s sixth annual Global Climate Action Barometer, EY analyzed the public disclosures of approximately 1,400 companies across 51 countries and 13 sectors, assessing factors including the link between companies’ climate disclosures and their transition-related actions, and the connectivity with financial disclosures on climate risk.

For its reports, EY assigned scores for climate-related disclosure coverage and quality, based on the number of TCFD recommendations addressed in the companies’ reporting, and on meeting the requirements of the TCFD recommendations, respectively. While the study found that climate-related reporting coverage has reached 94%, with nearly all companies disclosing at least some information on all TCFD recommendations, the quality of reporting lags, with an average score of only 54%, improving only slightly over last year’s 50%.

The report also found that a disconnect between companies’ climate-related and financial reporting, with only 36% referencing the financial risks of climate change, including physical and transition risks, on their financial statements. Moreover, this metric improved only slightly from last year’s 33%, despite significant growth in the proportion of companies conducting scenario analysis to assess climate risks, which increased to 67% of companies from 58% in 2023. Within companies that are referencing climate impact on their financial statements, 80% of the references are qualitative, and only 20% provide quantitative references.

By region, the study revealed that jurisdictions with regulatory climate reporting requirements in place are typically ahead in disclosure quality, with the UK, which put in place mandatory TCFD reporting for large companies, topping the list with an average quality score of 69%, and the EU, which has recently rolled out its CSRD reporting requirements, at 60%, while the U.S. lags at 53%.

The study found the highest scores in sectors with significant exposure to climate risk, with the energy and insurance sectors each achieving 59% quality scores, and strong year-over-year improvements in other transition risk-exposed sectors including mining, banking and transportation.

The report indicated that companies are lagging on transition planning, with only 41% of companies reporting that they have transition plans in place, although another 21% indicated that they have plans to implement one. The UK and EU scored highest on this metric as well, with 66% and 59% of companies in these jurisdictions, respectively, reporting having adopted transition plans.

In the report, Dr. Matthew Bell, EY Global Climate Change and Sustainability Services Leader, and Christophe Lumsden, EY Global Climate and Decarbonization Leader said:

“Climate change is the greatest existential threat facing humanity today — although you probably wouldn’t realize this from the climate disclosures of the world’s biggest companies. Most are still not reflecting the physical or transition risks associated with climate change in their financial statements. Neither do many communicate a plan for transitioning to a net-zero economy, with capital and operational expenditures (capex and opex) projections still not in place. The unavoidable takeaway from these omissions is that most companies remain woefully unprepared for the disruption that is upon us.”

EY’s study also climate target setting by companies, finding that while 83% of companies have set short-term targets, only around half (51%) have set emissions reduction goals that extend beyond 2030. Additionally, less than a quarter of companies (24%) have had their targets validated by the Science Based Targets initiative (SBTi). By emissions scope, 50% of companies have set emissions reduction targets that include Scope 1, 2 and 3 emissions, and 21% have set Scope 1 and 2 targets.

The report also examined companies’ decarbonization strategies, finding that most action to address emissions is taking place on Scope 2, or indirect emissions from the generation of purchased energy, which accounts for 55% of disclosed decarbonization actions, while only 18% of companies have included Scope 3, or value chain, decarbonization initiatives as part of their transition plan, despite Scope 3 accounting for the significant majority of most companies’ carbon footprint. EY suggested that the focus on Scope 2, with initiatives including renewable energy procurement and energy reduction strategies was “likely due to the economic feasibility, simplicity and availability of solutions,” noting that “reductions in Scope 2 emissions tend to be low cost and might even generate a net return.”

Bell and Lumsden said:

“The disconnect between companies’ ambition and action on the decarbonization agenda can be attributed to a range of challenges. These include the pressure to balance profitability with climate goals; the unavailability and expense of low-carbon technologies; a shortage of green skills; a political backlash against sustainability in some markets and sectors; and the very real complexities involved with setting and achieving targets.”

Click here to access the report.