The journey has begun, and we’re currently finding ourselves in open water somewhere in the midst of Milestone 1 – the research phase. We are diving through hundreds of existing sustainability reporting frameworks and thousands of KPIs. Additionally we are undergoing multiple user studies of the actors involved and trying to grasp an understanding of the climate risks that might be upon Nordic SMEs in short and medium term perspective. Just to add to the complexity, the entire project got thrown into the digital sphere and out of the initial project plan as Covid-19 touched upon us as well.
Now we are 15 participants – most of us have never met physically – based in four countries, three generations, two time zones and a massive digital infrastructure to support our work and progress. The challenges are not few to say it at least. We are aiming at releasing findings from Milestone 1 by mid-November, and if the world stays the same-ish until February we should be able to release the very first beta-version of the standard by then.
We do not aim at inventing the wheel and add to the complexity in the sustainability reporting jungle. We aim at identifying missing links, so we hopefully can add a contribution to bridge a gap in current practice allowing Nordic SMEs to get started with sustainability disclosures – hand in hand with their closest advisor, the accountant.
Climate risks in Nordic SMEs
In this status-report, we would like to share some initial thoughts regarding climate risk disclosures as we find this is an increasingly important leverage point in our research – and for the development of NSRS.
The climate risks, including physical and transition risks, predicted for decades are now beginning to materialize. The physical risks are observed through a rise in changing weather patterns and an increase in signs of ecosystem collapse to mention a few. Consequently global forces join in on accelerating a transition to a low-carbon society leading to radical changes in the regulatory landscape, as well as a rise in bottom-up movements that seems to be increasingly successful in mobilizing citizens to change behaviors and consumer patterns in favor of reaching a low-carbon society. The multiple streams of emerging trends and new patterns is changing the rules of the game for corporations globally. Disruption in value chains, as well as the markets and the regulatory scene leaves corporations left in a jungle of strange animals that demands their attention abruptly.
Frameworks such as Task Force on Financial disclosures(TCFD) is developed by Bloomberg and has become a leading framework for calculating climate risks and associated costs. Furthermore, the EU-commission has developed non-binding guidelines for climate related information in a non-financial disclosure in agreement with the non-financial reporting directive. The guidelines are based on the recommendations from TCDF.
Additionally, EUsTaxonomy, which was released in June 2020, will likely increase the focus on linking costs to mitigation and adaptation activities even further as it require all participants in the capital markets, large companies and nations to report on the industry-specific KPIs outlined in the new common framework as outlined in the technical annex.
From a company-perspective, insights regarding climate, and thus financial, risks seems to be an opportunity to engage shareholders in a dialogue regarding future directions and strategies leading to a competitive advantage for those engaging in the field.
A couple of weeks ago the organization Principles for Responsible Investment published an open letter, calling on companies to reflect climate-related risks in financial reporting. The investors view that climate-related risks are material factors that should be reflected appropriately in financial statements. Given the scope and mandatory nature of the IFRS regulatory framework, it is particularly valuable that the reflection of climate-related risks is required under this framework and subject to external assurance by auditors.
This includes the appropriate reflection of climate-related risks in financial statements, and the transparency of assumptions.
From the company-perspective
Nordea aimed at mapping out what Nordic companies state on their behalf when it comes to climate risk and sustainability efforts. 530 respondents participated in the study across company size. All the Nordic countries where represented. On average Nordea found that companies claim that they have little knowledge on the climate risks they are facing as well as potential development areas in an environmental perspective. Further findings revealed that the small sized companies reported the lowest knowledge when it comes to ESG related risks and development areas. Nordea also find that the main driver for focusing on sustainability in the Nordic companies are meeting customer demand, whereas climate risk is listed at bottom five drivers. Additionally, Nordea reveals that risk as a reason to focus on sustainability increases with size. Only 11% of small companies with 0-19 employees state risk as a driver for focusing on sustainability, compared to 18% of the companies with more than 100 employees states risk as a reason for focusing on sustainability.
Climate risk disclosures are on the agenda, and voices from several arenas are stressing the demand. However, little research is done on climate risk disclosures and Nordic SMEs. We do not aim at filling this research gap, but we aim at mapping out the situation and start a conversation on possible hot spots for Nordic SMEs.