Carbon Tracker’s report released today (“Flying Blind: The glaring absence of climate risk in financial reporting”, September, 2021) should set off alarm bells.
None of the 107 companies reviewed have produced financial statements consistent with a 2050 net zero carbon emissions pathway. These companies were analysed because they are likely to be impacted by decarbonisation. Only 30% even made reference to climate change in their accounts.
Put another way, each of these fossil-fuel-intensive companies is basing their reported profitability, assets and liabilities on the world failing to control climate change. The flip-side of this conclusion is that, if these companies did produce accounts that reflected falling long-term demand for fossil-fuel-based goods and services, their reported profits and net assets would likely be lower.
There are varying views as to whether policy-makers will eventually deliver on their climate commitments. However, Carbon Tracker’s analysis underlines that disclosures today appear to fall short of even the legal minimum. For example, Major US oil and gas majors are not disclosing critical accounting assumptions like the long-term oil price they use in impairment testing. Without these accounting assumptions, investors are unable to properly interpret their financial statements.
Where disclosures of assumptions are made, there is no evidence that they factor in ongoing decarbonisation.
This is true even where the same companies discuss the risks they face from decarbonisation in their narrative reporting. Companies are presenting two different pictures of their economic position in the same annual report. How can this be fair and balanced?
Investors and the public deserve better. Therefore, financial statements should present a reliable view of companies’ financial position, taking into account the world’s ongoing energy transition. If they do not, they should be investigated for misrepresentation.
Investors have set expectations for companies to provide visibility of how a 2050 net zero pathway targeted by governments globally would impact their financial condition. Investors have asked auditors to alert investors where they are being misled.
Without these disclosures, it is hard to see how the financial system will ensure capital is allocated in a way that supports a safer planet.