EU Corporate Climate Disclosures: An Evaluation of Completeness and Quality

Key Insights:

The 2015 introduction of the Taskforce for Climate-Related Disclosure (TCFD) guidelines sparked a proliferation of reporting frameworks, standards and regulations around sustainability and climate reporting. The frameworks and standards aimed to provide corporate stakeholders with relevant information about issuers’ understanding of climate-related risks and their strategies to effectively manage them. TCFD guidance, as well as reporting standards, such as those set out by the International Sustainability Standard Board (ISSB) or the Corporate Sustainability Reporting Directive (CSRD), have been adopted or transposed across jurisdictions as governments explore paths to meeting their decarbonization goals and climate commitments. 

This article is the first in a three-part series based on data from Morningstar Sustainalytics’ Low Carbon Transition Rating, evaluating European issuers’ preparedness to manage the shift toward a low-carbon economy. In this article, we assess European companies’ corporate climate-risk disclosures and their preparedness across the four thematic areas recommended by the TCFD – governance, strategy, risk management, and metrics and targets.

Evaluating Climate-Related Disclosures

The Low Carbon Transition Rating is an assessment of a company’s current and future alignment to decarbonization pathways, which can be presented as both an implied temperature rise and value at risk. The assessment also includes the TCFD disclosure sufficiency score, a metric indicating the extent to which a company’s reporting covers the topics recommended by the TCFD and which can be used by investors to assess the completeness of a company’s climate risk reporting. This signal is calculated by first identifying which indicator(s) should be disclosed according to the TCFD, then mapping each indicator to the relevant TCFD theme. Based on the company’s publicly available reporting, we evaluate how many recommended indicators are disclosed. For this exercise, the calculation is agnostic to how well the company is reporting or performing on each topic, considering only whether the company is reporting on the topic or not.

Unsurprisingly, our research finds that given the stronger regulatory requirements in Europe and the United Kingdom, companies there have the highest rates of TCFD-aligned disclosures compared to other regions. The average TCFD disclosure sufficiency score for EU companies is over 57%, and European non-EU companies over 62% (Figure 1).

Figure 1. Average TCFD Disclosure Sufficiency Score by Region

^{Source: Morningstar Sustainalytics. For informational purposes only.}

^{Note: Data as of February 5, 2025.}

A company’s TCFD management quality score provides additional context on how well it’s performing in each of the thematic areas. We found that across regions, the theme of metrics and targets has the highest average TCFD management quality score (see Figure 2). Metrics and targets are typically the first area addressed by a company when preparing a TCFD report, following the principle that risk must be measured to be managed. On average, European (non-EU) companies have the highest management quality on the metrics and targets theme (59), followed by governance (36). Higher quality management is needed in the areas of strategy (15) and risk management (16). European (EU) companies follow closely, with an average score of 51 on metrics and targets, 28 in governance, 19 in strategy, and 15 in risk management. Significantly more effort, time and organizational buy-in is required to implement effective climate governance, strategies and risk management practices once initial targets and baseline assessments have been completed.

Figure 2. Average TCFD Management Quality Scores by Theme and Region

^{Source: Morningstar Sustainalytics. For informational purposes only.}

^{Note: Data as of February 5, 2025.}

As companies enter their second, third and fourth year of producing TCFD (and ISSB/CSRD)-aligned reports, we expect to see the quality of disclosure around governance, strategy, and risk management increase. If disclosure quality in these areas stagnates, this would be a cause for concern for investors looking to meet decarbonization ambitions.

With Regulatory Uncertainty on the Horizon, Will EU Companies Stay the Course?

Our analysis shows that companies in Europe are leading with respect to disclosing key aspects of their approaches to climate risk. This is due, in part, to the extensive regulatory environment in the region. Regulations, such as the CSRD or the Corporate Sustainability Due Diligence Directive (CSDDD) are aimed at broadening the scope of factors considered material by companies and standardize how companies reported on addressing these factors. Additionally, the UK’s mandatory climate-related financial disclosures introduced in 2022 have contributed to the high level of disclosure in European (non-EU) companies.

The information disclosed by companies complying with these standards and directives is critical for investors to meet their own decarbonization targets and regulatory obligations. Despite the simplification of sustainability-focused regulations currently being proposed in the EU, companies’ disclosure of, and investors’ access to, sustainability and climate-related metrics and data will remain essential to understanding how companies are managing the full breadth of material risks they face. Regardless of the regulatory uncertainty, the need to transition to a low-carbon economy will remain, as will the desire for climate-related information to support investment risk analysis. 

This article includes contributions from Pustav Joshi, Associate Director, Carbon Mitigation Research Oversight and Arthur Carabia, ESG Policy Research Director.