Financial statements that leave out material climate impacts misinform executives and shareholders and thus, result in misdirected capital. Company leaders without correct cost and return information are equivalent to pilots without a properly functioning altimeter. In extreme cases, companies on the wrong flight path – like planes – can crash. In the case of climate change, the consequences of misdirected capital are not only harmful for shareholders, but also potentially disastrous for the planet.
Take a coal power company. Does the company presume asset lives that take us beyond 2050 and thus bake in dangerous levels of emissions? Have they taken account of escalating carbon taxes, or the falling costs of competing renewable energy? Might there be impairments in certain fossil fuel-dependent assets? What about end-of-life clean up liabilities; will these need to be brought forward, thereby wiping out capital previously reported?
At present there is little evidence that companies are taking decarbonisation or the physical impacts from climate change into account as they draw up their financial statements. This is true even where their strategic report or management discussion outline detailed climate risks as recommended by the Task Force on Climate-related Financial Disclosures (TCFD). Apart from a few notable exceptions, auditors are likewise currently silent on whether financial statements are ‘climate-proof’.
This paper, authored by Natasha Landell-Mills, and published by the Institutional Investors Group on Climate Change (IIGCC), sets out in unequivocal terms investor expectations that directors and auditors deliver Paris-aligned accounts – accounts that properly reflect the impact of getting to net zero emissions by 2050 for assets, liabilities, profits and losses. Only then will management, investors and creditors have the information they require to deploy capital in a way that is consistent with the Paris Agreement.
Where directors or auditors fail to deliver on these expectations, investors are committed to acting through engagements, voting, and – in certain cases – divestment.
Alongside a group of long-term investors, Sarasin & Partners has also written a letter to the audit committee chairs of thirty-six prominent companies, including a copy of the paper, and suggesting that they use it as a guide for ensuring material climate risks are fully incorporated into their financial statements.