Do publicly quoted companies have better climate related disclosures than private equity & venture capital backed companies?

Since 2020, carbon disclosure has gone from a niche to mainstream requirement. We’re seeing a number of themes emerge as the investment community continues to grapple with the increased regulatory challenges which faces them in 2024. 

This variable reporting, across the board, is a product of recent regulations and complex accounting challenges for robust disclosure. Regulatory bodies are seeking to close the quality gap which has led to multiple new regulations and disclosure frameworks which lack clear interoperability, even though increased alignment is arriving. Investors and companies often lack the clarity that would support better levels of achievement, although this is not of itself, a complete barrier to substantive action. 

Climate related financial disclosures are best encapsulated in the TCFD framework, which requires a fusion of strategy, governance, risk/opportunity analysis as well as metrics and targets. Most companies can deliver some metrics, however often not all of those that are material to their operations/impact, with a bias to those which are easily measured or often estimated. Targets by extension are early stage and often incomplete. 

In summary, disclosure and targets are the main focus, with less consideration given to strategy, governance and wider considerations of Enterprise Value. 

The approach is changing. And here’s why:

From 2021, companies may have scored points for having some measurement in place. 

In 2024 though, the depth and quality of proper accounting and the financial implications of decarbonisation are all moving rapidly into focus. Any disclosure, rather than high quality disclosure, is increasingly not enough. The requirement for the EU’s CSRD reporting to be supported by limited assurance and the recent Transition Plan Taskforce Disclosure Framework are both good examples of this direction of travel. The costs of transition to lower carbon operations can impact ROI both negatively and positively as longer-term decarbonisation pathways and related investment/benefits are understood. 

Increased focus on the quality of decarbonisation metrics is rapidly growing in both pre-deal due diligence and the sale of assets. One recent report suggested that companies who have clear metrics and Net Zero pathways, coupled with forward impact assessment of climate impact could derive up to an additional 1.2X in valuation. 

Conversely, poor disclosure, especially when compounded by unsupported green claims, present a clear value risk that is also fledging in regulatory attention (fines, media campaign suspensions) and lawsuits that are not restricted to very large companies. 

The upswing in demands from companies and investors to improve disclosure and decarbonisation plans is happening at a time when there are significant global economic challenges, which add pressure to profits and valuations. 

The idea that best practice approaches are a luxury that can’t be indulged, is not actually borne out by the operational cost savings of reduced emissions, unless large consulting firms are engaged to solve a problem that can be addressed through carbon accounting and related solutions. 

The uplift in Enterprise Value should not be discounted when viewing decarbonisation through the prism of return on investment.