Corporate financial statements must consider climate risks

What’s happening? A review of 134 carbon-intensive companies by Carbon Tracker group found that 98% failed to provide evidence that their financial statements had taken into account the effects of climate-related matters. (Carbon Tracker)

Why does this matter? Climate risks can pose a significant financial threat to companies. Financial statements that do not consider climate-related matters may include overstated assets, understated liabilities and overstated profits.

Poor financial reporting hinders decarbonisation progress –While there has been a noticeable growth in net-zero pledges and other climate-related commitments from large firms, progress in detailing the financial impacts of these commitments and climate risks in financial statements has been limited. Without this information, investors are unable to ensure that risks are properly priced, and that capital is allocated accordingly. This is detrimental to progress in decarbonising the global economy, the Carbon Tracker report said.

Which companies were looked at? The companies analysed by Carbon Tracker are Climate Action 100+ focus list companies and are among the world’s largest corporate greenhouse gas emitters, making them key players in the net-zero transition.

Auditors under the spotlight – Out of the audit reports reviewed, 96% did not adequately show whether auditors considered the impact of climate issues when auditing these firms. The report found Deloitte was the only auditor that provided comprehensive evidence indicating it had considered climate change in an audit report. In April, the company invested $1bn to expand its sustainability and climate practice.

Carbon Tracker added auditors should provide full transparency on how they address climate-related matters, and that investors should use the study’s results to help inform engagement, voting and investment decisions.

The financial importance of disclosing the impact of moving to net zero can be seen using Glencore as an example. The company disclosed sensitivities to certain carbon-intensive assets using the International Energy Agency’s Net Zero by 2050 price deck. The firm said that $9.6bn of its $10.6bn investments in thermal coal assets would have to be written down to achieve net zero. Carbon-intensive firms that have not made these disclosures may therefore have considerable hidden risks.

Poor reporting may indicate greenwashing – Companies which have set net-zero targets, but are not aligning inputs with achieving these goals, indicate signs of greenwashing. Previous research from Net Zero Tracker has found that the emissions-reduction targets among the world’s biggest companies have “major credibility gaps”. Out of over 700 firms analysed, two-thirds did not disclose how they intend to reach their climate targets.

Will the ISSB solve matters? The launch of International Sustainability Standards Board (ISSB) standards is expected to standardise certain aspects of sustainability reporting and will be complementary but separate to information currently reported in financial statements. Carbon Tracker stated the standards should improve the consistency of climate-related information across a firm’s disclosures.

Moody’s recently estimated that resource-intensive sectors could face $1.9tn in credit risk from nature loss. In this context, the importance of financial statements accurately reflecting climate-related risks is clear.