OMXH25: Climate change and targets strongly on the agenda, waiting for economic impact assessments

Assessment of risks and opportunities related to climate change and setting climate targets are already a cornerstone of ESG work. Different industries must react both to legislation seeking tightening emission reductions and the changing operating environment, and even physical risks. Of course, the timeline varies quite a lot between industries. The impacts are already clearly visible in the energy and raw material industries while many industries have been able to sit back and watch what happens, without major strategic changes.

The current energy crisis escalated radically because of the Russian military aggression. However, the effects of the escalation of energy issues and price increases have been informally discussed for a couple of decades, e.g., among climate researchers. A few years ago, the investment world also began promoting the reporting of corporate climate risks and opportunities to provide clearer and more concrete information. (Task force on climate related financial disclosure led by Michael Bloomberg). 

The expected value is that setting of climate targets, as well as climate risks and opportunities, will in future be reflected in business communications and operations driven by both legislation and market trends. We, therefore, decided to look at where we are now. We focus our examination on OMXH25 companies and, above all, on how systematically climate risks and opportunities are handled. Given that, e.g., the economic impact of energy issues is a very acute topic, we focused on how well climate risks (e.g. energy prices, supply risks associated with subcontracting, needs for change in the product portfolio, investments needed to achieve the targets) are currently reported from a financial perspective. We also looked lightly at taxonomy reporting. We did so because, it seems that in future, e.g., legislation, expects that taxonomy indicators would show, at least in certain industries, the investments in meeting climate objectives, for example.

Although companies communicate climate issues through different channels, we only assess the reporting based on 2021 Board of Directors’ reports. We feel that opening climate issues through the company's senior management brings the conviction that the issue is actually assessed as part of strategic work, whether it is material or not.

So in this article we do not yet take a position on how we see climate risks or preparedness for them materializing in a particular industry or company, we only assess how the companies report on them themselves.

Starting level increases expectations for increased concreteness in 2023

At a glance, OMXH25’s Board of Directors’ reports confirm that Finnish OMXH25 listed companies are generally excellent and conscientious in reporting climate change and setting related targets.

However, the same assessment reveals that most companies still have a long way to go to give investors a picture of what climate change really means for the company in question. Concreteness, clarity, projection, and scaling is needed when describing the risks and opportunities presented by climate change. The same applies to the description of investment needs to meet climate targets.

World class climate targets but more information needed on what achieving them means for business 

Nearly all OMXH25 companies have a climate-related objective mentioned in the Board of Directors’ report. Most (14/25) have even committed to the so-called science-based climate target, where emission reductions for the whole value chain (roughly: own energy production, purchased electricity and heat, products, subcontracting chain) are in line with the Paris 1.5°C warming scenario.

However, an investor needs more information about the potential financial or operational changes related to achieving the emissions targets. If reductions are to be made in emissions from the use of a subcontracting chain or products, it would at least in some cases probably mean increasing costs and possibly even major revisions of the product portfolio. E.g. Tokmanni is committed to reducing its emissions also in so-called scope 3 emissions (e.g. subcontracting chain or products). Considering the company’s industry, more information on the timeframe for implementing the emission reduction measures would be useful. If the aim is to reduce emissions in subcontracting or products, will the reduction affect operational costs and thus the result and when.

A description of climate risks and their response gives a picture of the company management’s insightfulness to assess the business impact of uncertain events related to climate change

Less than half of OMXH25 companies have assessed the risks and opportunities presented by climate change in the Board of Directors’ report and some only at very top levels.  Although these events involve major uncertainties, the description indicates that the company management has assessed the issue regardless of whether it was found to be relevant for the business. Physical, legal and other risks and opportunities related to the climate change era have in fact affected companies’ businesses for years and both sudden one-off effects (distribution interruptions) and strategic business impacts (what you can sell and what not and where) are expected.

Nokian Tyres and Cargotec have distinguished themselves in describing climate risks and opportunities. On the other hand, one could expect that these issues would be more clearly present in the Board of Directors’ report of ,e.g., Valmet, Wärtsilä and Nokia next year This is because these companies have already set quite extensive climate targets. The default is that management, including the Board of Directors, has addressed the uncertainties, risks and opportunities related to climate change also in more detail.

Investments relative to achieving climate targets would concertize development and bring scale

It has been estimated that in an ideal situation in the future the growth of taxonomy CAPEX and OPEX would correlate with the pace of achieving climate targets. Unfortunately, however, this is not yet the case, simply due to the lack of taxonomy legislation alone. Thus, credibility during the transition period for ESG legislation and reporting would increase by voluntary reliance on figures. Metso Outotec has already mentioned its goal of directing 100% of R&D project costs to projects with annual targets related to energy efficiency, emissions, circular economy, water use or safety.  This is the right direction; more information is needed on what this means for overall economic impact and the achievement of set climate targets and when.

High expectations for 2023 

For OMXH25, climate targets and commitments are starting to be clear for most companies. An increasing number of companies describe the risks and opportunities in their Board of Directors’ reports, which, from the investor's viewpoint, creates faith in the risks being assessed in depth considering the company’s overall strategy. Since the initial work is already on track, expectations are high for the future.  We can continue the discussion on this subject in Inderes Forum on responsible investment.

The author of this article, Karoliina Loikkanen, is head of ESG solutions at Inderes. She has an extensive background on ESG issues and is passionated to develop the dialogue between investors and companies on ESG further.