With a new report finding that just one out of 50 airlines are making good on their sustainability pledges, it’s clear that companies are not understanding the true impact climate risk has upon their business.

This is particularly significant for an industry that contributes 2.5% to CO2 emissions. Although a seemingly small number, its relevance is heightened when we consider that just 3% of the global population takes regular flights. Whilst many airlines have pledged to make use of more efficient fuels, the 1% improvement in the fuel efficiency year on year is failing to match the 6% increase in flight volume.

The link between climate change and business success.

The global population is coming to the consensus that climate change is a bad thing and a real risk to the world, but some businesses are failing to take into account the tangible impact it has on business success and ultimately their bottom line. With a study by the Carbon Brief finding that 70% of the 405 extreme weather events occurring since 2011 have been worsened or made more likely due to human-caused climate change, there is undeniably a huge financial risk facing the airline industry. The financial impact can be illustrated by the 436 flight cancellations in the UK alone due to February’s Storm Eunice, causing disruption to customers and to businesses. With the number and severity of extreme weather events already increasing, flight cancellations and delays are going to become a more common occurrence, resulting in falling revenues and lost profits for the industry.

The introduction of the TCFD.

More recent accounting legislation is attempting to shift the mindset of companies, forcing them to consider the material risks associated with climate change. This is exemplified by the UK’s mandatory enforcement upon businesses to disclose the climate-related risks and opportunities facing them in line with the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD). The TCFD recognised that asset valuation was not true and accurate without taking into consideration the impact of climate policies, physical risk, and new technologies. The TCFD has also identified that there is up to $43 trillion of manageable asset value at risk as a result of climate change by 2100, highlighting the importance of taking into account such risks to ensure fair disclosure.

It still hasn’t clicked for companies.

A report by EY found that whilst uptake in the TCFD legislation has improved significantly globally,  the average quality of disclosures score sits at just 42% with the strategy and risk management components scoring the lowest, limiting a business’s ability to survive in the long-term. Perhaps most worryingly of all however was EY’s finding that just 41% of companies made any references to carrying out scenario analysis, the most complex yet important element of disclosure. It is almost certain that the benefits of conducting scenario analysis far outweigh any cost or effort as the activity allows for organisations to produce actionable strategies to combat risks and capitalise on opportunities.  

It is important to consider that mandatory reporting on climate-related risks is not a new thing, whilst the IFRS requirements are principal based and therefore do not explicitly reference climate-related risks, anything material in nature should be included within the financial statements. The TCFD encourages companies to establish continuity between references made in the front and back half of their annual reports to ensure that those risks material in nature, as outlined by IAS 1.7, are being accurately reported. Despite this, a 2020 study of 100 companies on the London Stock Exchange by Deloitte found that whilst 90% of companies referred to climate change in their annual reports, just two explicitly referred to them in their financial statements, highlighting a lack of understanding regarding the materiality of climate-related risks and opportunities. Although, things have changed somewhat since then, with significantly more businesses recognising the requirement of the TCFD, a vast number are leaving themselves at the mercy of the FRC should the lack of high-quality disclosures continue.

To exemplify the breadth of impact climate-related risks have on accounting policies and the content of the financial statements, we’ll use an example from the airline industry itself. It is very possible that in the future the government imposes carbon taxes on the airline industry to promote its net-zero agenda. Consequently, airline groups must invest in a new fleet of green aircraft and phase out those planes that are high in carbon emissions. In order to report effectively, the airline group must alter their depreciation policies in line with IAS 16.50 to account for the revised useful life of their current assets. Such possibilities are material in nature and therefore should be included within the back half of their financial statement.

Having reviewed seven of the largest airline operators in the UK, just two of them have effectively disclosed their climate-related risks and opportunities in line with the TCFD framework and only three have made reference to scenario analysis within their reports. For an industry that undeniably faces material risks as a result of climate change, this is a worrying sign for the sector. It also highlights that there is a vast range of opportunities being missed that could serve to benefit the aviation industry, particularly as it continues to recover post-Covid19. With the introduction of the IFRS S1 and S2 coming into play in the near future, it is paramount that companies get into the habit of appropriately reporting on their climate-related risks now. 

Where we come in.

Matter Partners recognises that many companies strive to incorporate the risks and opportunities posed by climate change into their strategies, but simply don’t have the necessary tools. Climate-related reporting has often varied between standards boards and is not consistent in its requirements, the TCFD is attempting to tackle this and we support companies to effectively disclose in line with the framework. We believe that education is a huge aspect of this and understand that there are very few resources out there to fulfil this need. Therefore, we strive to provide companies with the resources needed to effectively disclose against the TCFD requirements.  It’s really important to us that companies are able to disclose independently without relying on consultants like us, only then can businesses truly make the most of the opportunities offered by climate-related disclosures.