Carbon Tracker this morning released their latest analysis into whether the largest carbon emitters globally are properly reflecting decarbonisation in their financial statements.
This is vital because until companies align their accounting disclosure with a 1.5C pathway, they are unlikely to allocate capital in line with a 1.5C pathway.
The result of this latest review is that – like last year – no CA100+ focus company has fully met investor expectations that their accounts capture material climate risks. Critically, disclosure on the implications of a 1.5C scenario is virtually non-existent. And this is true even though a significant majority of companies had 1.5C-aligned targets or ambitions.
This means that, for instance, shareholders in conventional auto-manufacturers have little transparency as to whether companies are properly recognising declining demand for internal-combustion engine product lines, rising carbon taxes or preparing for earlier end-of life liabilities.
Similarly, investors in a net zero committed mining company cannot tell whether the ambitious carbon sequestration promises have been incorporated into asset impairment testing. If these factors are not considered, how can shareholders rely on reported net asset values or have confidence in future dividend flows?
The longer companies’ accounts across all sectors fail to reflect the profound economic changes underway as the world transitions away from fossil-fuels, the bigger the system-wide stranded asset risk becomes. This clearly matters to investors charged with investing for future returns; it should also matter to prudential regulators. Over time, it has the potential to undermine confidence in the broader market.
While the picture painted by Carbon Tracker’s report is bleak, there are important signs of progress.
Critically, in companies where shareholders have undertaken concerted engagements over the past two to three years, we can see improved accounting practices. This is true even at the most carbon-intensive, and thus materially-exposed companies.
Oil and gas majors Shell and BP, for instance, now offer detailed disclosure for how climate factors have been examined in their accounting processes, and the auditors provide meaningful insight into steps they have taken to check this work.
Air Liquide, a large industrial gases company, similarly has shown leadership in its commentary around how it has considered climate risks affecting its business, and has committed to offering further detailed sensitivity analysis in 2023.
These examples amongst others demonstrate the ability of companies to act. By including accounting and audit metrics into the CA100+ benchmark against which companies are assessed, we are hopeful that we will see rapid progress in accounting and audit disclosures in 2023.