Carbon Tracker’s latest analysis points once again to the danger of climate-related financial risks hidden in companies’ accounts.
Climate reporting is now an established part of the corporate diary. Task Force on Climate-Related Financial Disclosures (TCFD) reporting covering climate strategies, targets, risks and opportunities are being subsumed into the International Sustainability Standards Board (ISSB) climate reporting rule “IFRS S2 Climate-related disclosures”, which will become the global standard for climate reporting[1].
And yet we are still waiting for companies’ financial reports to address material climate risks properly. This is the core conclusion from Carbon Tracker’s latest analysis of 2022 Financial Statements (published in 2023) for the 140 of the world’s largest greenhouse gas emitters. Remarkably, 60% of companies reviewed failed to provide meaningful information about whether, and how, climate risks and the energy transition impact the financial statements.
You might conclude from this that despite all the hoopla around climate risks, the reality is they are not material to company’s expected cash flows, asset values or liabilities.
The problem is that these same companies are frequently setting out in their TCFD disclosures how climate change, the associated policy actions by governments and their own climate commitments will be material for their future performance.
Of course, there are uncertainties. But does uncertainty mean they should be ignored in companies’ accounts? Generally speaking, it the impacts are probable, they should be incorporated.
We need numbers, not words alone
Even where climate impacts are probable and foreseeable, for instance where a company has set out specific plans to reduce emissions by purchasing more renewables power, investing in energy efficiency or capturing and storing carbon emissions, it is not always evident how the associated cash flows are being captured in the accounts. If the future use of an asset is predicated on carbon capture and storage, then one would reasonably expect that the cost of this investment would be accounted for in impairment testing.
Such disconnects between climate change reporting in the front half of an annual report and the financial statements is precisely what Carbon Tracker finds. None of the 140 companies they reviewed had “fully consistent accounting and reporting”. Worse still, just 7% of auditors flagged this as a concern.
Regulators are increasingly alert to the problem. However, Carbon Tracker’s report points to a widespread disregard for supervisory notices that require companies to reflect climate risks in their accounting[2]. A few companies, like CRH, have been singled out for review by the accounting regulator, but that doesn’t seem to be moving the needle[3].
Why does all this matter?
Let’s put it this way. If an oil and gas company estimates that it could lose up to 12% or 17% of its total equity in a scenario of accelerating decarbonisation (as Shell reported in its 2022 and 2021 accounts respectively), investors can beware, and encourage the company to take action to build resilience.
If this is hidden, however, the market cannot prepare. Fear of the unknown is likely to be far more damaging to financial stability than transparent disclosure of climate-related financial risks.
[1] https://www.ifrs.org/sustainability/tcfd/
[2] See for instance the European Securities & Markets Authority enforcement priorities for 2023: https://www.esma.europa.eu/document/2023-ecep-package ; FRC equivalent: https://www.frc.org.uk/news-and-events/news/2022/12/frc-announces-areas-of-supervisory-focus-for-202324/
[3] https://www.frc.org.uk/library/supervision/corporate-reporting-review/crr-case-summaries-and-entity-specific-press-notices/?query=CRH&quarter=#crr-case-studies
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